-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, G7NKKIaSxu+33RmXTDFvP5IdyH8wRP0ntGJIRoU+evCH9P+dwZIl1LiHww8H9k70 mAeb0vs87O0szTltCjvcOQ== 0000950123-98-003238.txt : 19980407 0000950123-98-003238.hdr.sgml : 19980407 ACCESSION NUMBER: 0000950123-98-003238 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: ZEMEX CORP CENTRAL INDEX KEY: 0000075644 STANDARD INDUSTRIAL CLASSIFICATION: 1400 IRS NUMBER: 135496920 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-00228 FILM NUMBER: 98583694 BUSINESS ADDRESS: STREET 1: CT TOWER, BCE PLACE STREET 2: 161 BAY ST, STE 3750 P O BOX 703 CITY: TORONTO ONTARIO M5J STATE: A6 BUSINESS PHONE: 4163658080 MAIL ADDRESS: STREET 1: CANADA TRUST TOWER STREET 2: BCE PLACE 161 BAY ST,# 3750 PO BOX 703 CITY: TORONTO ONTARIO M5J STATE: A6 FORMER COMPANY: FORMER CONFORMED NAME: PACIFIC TIN CONSOLIDATED CORP DATE OF NAME CHANGE: 19860720 10-K405 1 10-K405 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 Commission file number 1-228 ZEMEX CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 13-5496920 (State or other jurisdiction of (I.R.S. employer incorporation or organization) identification number) CANADA TRUST TOWER, BCE PLACE, 161 BAY STREET, SUITE 3750 TORONTO, ONTARIO, CANADA M5J 2S1 (416) 365-8080 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT New York Stock Exchange Common Stock, $1.00 par value Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ---------- YES X NO ---------- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the registrant's voting stock (Common Stock, $1.00 par value) held by non-affiliates as of March 23, 1998 (based on the closing sale price of $9.3125 on the New York Stock Exchange) was $36,947,269. As of March 23, 1998, 8,803,606 shares of the registrant's Common Stock, $1.00 par value, were outstanding. DOCUMENTS INCORPORATED BY REFERENCE Annual Report to Shareholders for the Year Ended December 31, 1997 Part II Definitive Proxy Statement filed with the Commission pursuant to Regulation 14A with respect to the 1998 Annual Meeting of Shareholders Part III 2 FORM 10-K ANNUAL REPORT TABLE OF CONTENTS AND CROSS-REFERENCE SHEET PART I
PAGE ---- Item 1. Business ............................................. 1 Item 2. Properties ........................................... 8 Item 3. Legal Proceedings .................................... 9 Item 4. Submission of Matters to a Vote of Security Holders .. 9 Item 10. Executive and Other Officers of the Registrant(A) .... 9 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters(B) .................... 9 Item 6. Selected Financial Data (Unaudited)(C) ................ 9 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation(D) ................. 9 Item 8. Financial Statements and Supplementary Data(E)......... 10 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................... 10 PART III Item 10. Directors and Executive Officers of the Registrant(F) .. * Item 11. Executive Compensation(F) .............................. * Item 12. Security Ownership of Certain Beneficial Owners and Management(F) ............................... * Item 13. Certain Relationships and Related Transactions(F) ...... * PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K .......................... 11
__________________________ (A) Included in Part I, Item I, pursuant to Instruction 3 of Item 401(b) of Regulation S-K. (B) Information responsive to this Item is set forth on page 26 of the registrant's Annual Report to Shareholders for the year ended December 31, 1997 (the "Annual Report to Shareholders") and is incorporated herein by reference. The Annual Report to Shareholders is included as Exhibit 13 to this Form 10-K Annual Report. The Annual Report to Shareholders, except for those portions thereof which are expressly incorporated by reference herein, is furnished for the information of the Commission and is not to be deemed "filed" as part of this Form 10-K report. 3 (C) Information responsive to this Item is set forth on page 51 of the Annual Report to Shareholders and is incorporated herein by reference. (D) Information responsive to this Item is set forth on pages 19 through 26 of the Annual Report to Shareholders and is incorporated herein by reference. (E) Financial statements responsive to this Item are set forth on pages 27 through 50 of the Annual Report to Shareholders and are incorporated herein by reference. The Supplementary Schedule required by this Item is set forth on page S-1 of this Form 10-K Annual Report. (F) Information responsive to these Items is set forth in the registrant's definitive proxy statement to be filed with the Commission pursuant to Regulation 14A and in the Annual Report to Shareholders on page 48 (Note 15) and is incorporated herein by reference. 4 PART I ITEM 1. BUSINESS GENERAL Zemex Corporation (the "Corporation" or "Zemex"), a Delaware corporation, was incorporated in 1985 as the successor to Pacific Tin Corporation. Zemex is a niche producer of industrial minerals and metal products. Its principal businesses are industrial minerals, metal powders, and aluminum waste recycling. Its major products include feldspar, feldspathic minerals, kaolin, sand, mica, talc, ferrous and non ferrous powders, and aluminum dross derivatives. INDUSTRIAL MINERALS The Corporation's industrial minerals segment consists of five wholly-owned subsidiaries: The Feldspar Corporation ("TFC"), Suzorite Mica Products Inc. ("Suzorite") Suzorite Mineral Products, Inc. ("SMP"), Zemex Industrial Minerals, Inc. and Zemex Mica Corporation. The group is collectively referred to as Zemex Industrial Minerals or "ZIM". TFC has mining and processing facilities in Edgar, Florida; Monticello, Georgia; and Spruce Pine, North Carolina. Using traditional methods, TFC mines sodium feldspar from two different ore deposits in the Spruce Pine area; potassium feldspar is mined from two deposits close to the Monticello plant. TFC's kaolin and sand products are produced by dredging and wet separation at the Edgar property. TFC produces numerous products, including sodium and potassium feldspar, silica, low iron sand, muscovite mica and kaolin clay, at its operating plants. Feldspathic materials and kaolin are major raw materials for the ceramic industry, and are incorporated into the production of ceramic floor and wall tiles, dinnerware, plumbing fixtures, glazes and electrical insulators. TFC supplies its products primarily to the glass and ceramics industries. Feldspar and certain grades of industrial sand are also used to manufacture bottles, jars, and other glass containers, fiberglass, paints and plastics, and television picture tubes. Industrial sand is used for filter, filler, beach, blasting and concrete applications. TFC also produces a low iron sand product for use in specialized glass applications. Suzorite mines phlogopite mica in an open pit mining operation in Suzor Township, Quebec, Canada, approximately 200 miles north of Montreal, Quebec. The ore is mined by standard open pit methods and delivered to a siding for transportation by rail to the processing plant, which is located in Boucherville, Quebec, a suburb of Montreal. Because of its distinct thermal stability advantage over competitive materials, phlogopite mica is used in technological and high temperature plastic applications; Suzorite's phlogopite mica is used as a partial or complete substitute for asbestos in fire retardation, friction materials, oil well drilling needs, caulking and molding compounds, coatings, plasters and plastics. The principal markets served by Suzorite are the automobile, construction and oil drilling industries. These products are marketed under the trade names Suzorite Mica and Suzorex. SMP has talc operations in Natural Bridge, New York; Murphy, North Carolina; Van Horn, Texas; and Benwood, West Virginia. SMP purchases raw materials for conversion and processing at its plant in Natural Bridge; these products are directed primarily into the cosmetic and pharmaceutical industries. The production facility in Van Horn processes ores mined on-site for sale to the coatings, plastics and ceramics industries. The Benwood operation imports raw 1 5 materials, and processes a variety of calcium carbonate as well as a wide range of talc products for ultimate use in the plastics industry. In late 1996, SMP substantially completed the construction of a new mill at its facility in West Virginia. This new fine grind milling capacity is part of SMP's strategy to develop a niche in the talc marketplace by offering very finely divided high purity talc products to industrial markets. SMP believes that it is one of the few talc producers in North America to produce products of this purity and fineness. The products, which will see application in performance plastics, high end coatings and other markets, are currently being tested and appraised by a select group of customers. With the addition of these new fine grind products, Benwood has the ability to produce a broad spectrum of high purity talc products. In January 1998, the Corporation acquired two muscovite plants in the Spruce Pine, North Carolina area. The new facilities, which are operating under the name Zemex Mica Corporation, are located within close proximity of TFC's feldspar plant where by-product muscovite mica is produced. It is the Corporation's intent to process TFC's excess mica by-product at the newly acquired facilities. Muscovite mica is marketed to the paint and plastics industries, the same markets the Corporation currently services with its talc and barytes products. In February 1998, SMP entered into a joint venture with Industria Mineraria Fabi S.r.l. ("Fabi"), a leading producer of talc in Europe. Fabi paid $3.4 million to earn a 40% interest in the new joint venture company, Zemex Fabi-Benwood, LLC, and SMP contributed its facility in Benwood, West Virginia. This transaction provides SMP access to Fabi's talc processing technology and premium ore reserves. Demand for the Corporation's industrial minerals is somewhat related to the pace of the general economy and, particularly, to the automotive industry and the residential and commercial construction industries. The Corporation's industrial minerals sales were $43.4 million in 1997, compared with $40.5 million in 1996 and $37.1 million in 1995. This business segment reported operating income of $5.2 million in 1997, $1.4 million in 1996 and $4.6 million in 1995. During 1997, considerable efforts were directed to product development, marketing, capital expansion projects and product quality improvement. The Corporation expects these efforts will bear fruit in the future. Capital expenditures were $9.9 million in 1997 compared to $11.9 million in 1996 and $9.7 million in 1995. Major capital spending in 1997 included the completion of the sodium feldspar facility and the low iron sand plant at Spruce Pine, North Carolina, and completion of a fine grind mill at SMP's plant in Benwood, West Virginia. METAL PRODUCTS The metal products segment consists of Pyron Corporation and Pyron Metal Powders, Inc. (together, "Pyron") and Alumitech, Inc., Aluminum Waste Technology, Inc., ETS Schaefer Corporation, and AWT Properties, Inc. (collectively, "Alumitech"), all of which are directly or indirectly wholly-owned subsidiaries of Zemex. Pyron operates plants located in Niagara Falls, New York; St. Marys, Pennsylvania; and Greenback and Maryville, Tennessee. The Maryville operation, which was temporarily closed in order to optimize production efficiencies and lower operating costs, was re-opened in late 1997 due to 2 6 increased demand. In addition, a new water atomized copper powder process was successfully commissioned at the Greenback location in late 1996. Pyron's major products include iron, steel, copper, copper alloy powders and manganese sulfide. The primary applications of metal powders are in the fabrication of precision metal parts using powder metallurgy and the friction industry. Powder metallurgy is an efficient, economical process for the production of complex components used in the automotive, farm, garden and lawn equipment, and business machine industries. Key features of powder metallurgy technology are low scrap ratios and lower production costs than other conventional metal working processes such as machining, casting and forging. In recent years, metal powder use in the friction industry and, particularly, in automotive and rail braking systems has grown rapidly as a replacement for asbestos, achieving better performance and improved environmental and health conditions. Metal powders are also used in the production of welding rods, for cutting and scarfing of steel ingots and billets, for the inspection of oil field pipe and tubing, and in food supplements. In 1995, Pyron completed construction of a blending plant in St. Marys, Pennsylvania. Through its new blending plant, Pyron is able to provide custom pre-packaged powders and just-in-time service to its customers. In late 1996, Pyron completed construction of a facility designated for the production of manganese sulfide at its Greenback, Tennessee location. Pyron's new product, Manganese Sulfide Plus (MnS+(TM)), was developed in Pyron's laboratory and is used as an additive by the powder metallurgical industry to enhance tool life and aid in machinability. Customer demand for MnS+(TM) has been strong and, as a result, the capacity of the facility was doubled in 1997 to satisfy orders. Manganese sulfide is a natural complement to Pyron's core ferrous and non-ferrous businesses as it further broadens Pyron's product line. The Corporation acquired its initial interest in Alumitech in 1994 and increased its ownership to 100% in 1995. Alumitech has three processing plants: an aluminum dross reprocessing plant in Cleveland, Ohio and two ceramic fiber fabrication plants in Medina and Streetsboro, Ohio. In February 1997, Alumitech, through its wholly-owned subsidiary, Engineered Thermal Systems, Inc., acquired the assets of Schaefer Brothers, Inc., a small regional manufacturer of ceramic fiber-based heat containment systems located in Medina, Ohio. The Schaefer Brothers business was merged with Engineered Thermal Systems to form ETS Schaefer Corporation. Alumitech is an aluminum dross reprocessor that has developed and patented proprietary technology to recycle secondary aluminum drosses into commercial industrial feedstock components, eliminating the necessity for landfill. Aluminum dross is the waste by-product produced by primary and secondary aluminum smelters. Secondary dross, which has a high salt content, forms the primary feedstock for Alumitech's process. Conventional dross processors simply recover aluminum metal and send any remaining materials to landfill. Using its patented process, Alumitech has the ability to separate the dross into its basic components: aluminum metal, alumina and metal fines, salts and non-metallic product ("NMP") and further refine the NMP for use in the production of calcium aluminate, refractory ceramic fiber and other commercially acceptable products. Currently, competitive processes landfill anywhere from 40%-75% of the volume of dross received, whereas Alumitech's recycling process will virtually eliminate the need for landfill. Alumitech is considered the industry leader in the development of alternative uses for NMP. Alumitech's patents on its technology to process NMP have a remaining life of about thirteen years. 3 7 Alumitech also operates two ceramic fiber fabrication plants in Medina and Streetsboro, Ohio. At these facilities, refractory ceramic fiber components are fabricated into products used in various high temperature applications. Sales for the metal products group increased to $53.8 million in 1997 from $46.0 million in 1996. Sales were $48.0 million in 1995. The increase from 1996 to 1997 was due to higher volumes of ferrous and non ferrous metal powders and higher aluminum prices. During the same interval, operating income increased from $1.9 million in 1996 to $3.2 million in 1997. Operating income was $3.7 million in 1995. Management anticipates improved margins in this segment in 1998 as a result of new products, higher metal powder production, continuing cost reductions, and efficiency improvement programs. Capital expenditures for the metal products group were $6.6 million in 1997 as compared to $4.5 million in 1996 and $5.8 million in 1995. The expenditures were primarily directed to the construction and commercialization of a new NMP processing facility at the Cleveland plant. In 1998, capital expenditures are anticipated to be $4.3 million. RAW MATERIALS AND OTHER REQUIREMENTS In recent years, the Corporation has not experienced any substantial difficulty in satisfying the raw materials requirements for its metal products operations, which is the segment that consumes, rather than supplies, raw materials. However, no assurance can be given that any shortages of these or other necessary materials or equipment will not develop or that increased prices will not adversely affect the Corporation's business in the future. SEASONALITY The efficiency and productivity of the Corporation's operations can be affected by unusually severe weather conditions. During the winter of 1997, there were minor production outages at the Corporation's operating facilities in North Carolina and New York States due to inclement weather, but they were not significant enough to materially affect 1997 operating results. COMPETITION All of the Corporation's products are sold in highly competitive markets which are influenced by price, performance, customer location, service, competition, material substitution and general economic conditions. The Corporation competes with other companies active in industrial minerals and metal products. No material part of the Corporation's business is dependent upon any single customer, or upon very few customers, the loss of any one of which could have a material adverse impact on the Corporation. Industrial mineral prices generally are not subject to the price fluctuations typical of commodity metals. Demand for industrial minerals is primarily related to general economic conditions, particularly in the automotive, housing and construction industries. Markets for industrial mineral products are sensitive not only to service, product performance, and price, but also to competitive pressures and transportation costs. In the United States, there are three major feldspathic mineral producers, including the Corporation. The Corporation is the only North American producer of phlogopite mica and one of many talc producers. The Corporation is one of five North American producers of metal powders. The market for metal powders is affected primarily by product performance, consistency of quality and price. To some extent, competition in the metal powders industry is affected by imports of finished metal powder parts. Product prices over the last several years have been strongly influenced by 4 8 costs of production and available capacity. Demand for metal powders is a function of general economic conditions, particularly in the automotive market. There are numerous aluminum dross processors in the United States, however, only Alumitech has patented technology which enables it to process aluminum dross without the necessity for landfill. While the Corporation competes for the supply of aluminum dross with a number of other operations, the major factor affecting the supply of dross is the level of activity of the secondary aluminum smelting industry. In addition, as aluminum is one of the products of aluminum dross reprocessing, commodity price fluctuations of aluminum may have an impact on the earnings of the Corporation. RESEARCH AND DEVELOPMENT The Corporation carries on an active program of product development and improvement. Research and development expense was $1.0 million in 1997, $0.6 million in 1996 and $0.3 million in 1995. Financial information about industry segments is set forth on pages 39 and 40 of the Annual Report to Shareholders and is incorporated herein by reference. ENVIRONMENTAL CONSIDERATIONS Laws and regulations currently in force which do or may affect the Corporation's domestic operations include the Federal Clean Air Act of 1970, the National Environmental Policy Act of 1969, the Solid Waste Disposal Act (including the Resource Conservation and Recovery Act of 1976), the Toxic Substances Control Act, CERCLA (superfund) and regulations under these Acts, the environmental protection regulations of various governmental agencies (e.g. the Bureau of Land Management Surface Management Regulations, Forest Service Regulations, and Department of Transportation Regulations), laws and regulations with respect to permitting of land use, various state and local laws and regulations concerned with zoning, mining techniques, reclamation of mined lands, air and water pollution and solid waste disposal. Currently, the Corporation is not aware of any materially adverse environmental problems or issues. EMPLOYEES The approximate number of employees in the Corporation as of December 31, 1997 is set forth below:
Industrial Minerals 282 Metal Products 285 Corporate 7 --- Total 574 ===
Approximately 58 employees at the Corporation's metal powder operations in Niagara Falls, New York, are covered by a collective bargaining agreement. Negotiations are currently underway for a new agreement to replace the current three-year agreement, which expires April 15, 1998. At the ferrous metal powder facilities in Tennessee, approximately 42 employees are covered by a four-year agreement which expires February 28, 2002. Approximately 20 employees at Suzorite are covered by a three-year collective bargaining agreement that expires December 13, 1999. At Alumitech, approximately 28 employees are covered by two collective bargaining agreements, one agreement expiring April 30, 1998 and one agreement expiring December 31, 1998. On March 26, 1998, the hourly employees at TFC's plant in Spruce Pine, North Carolina voted in favour of union certification. Contract negotiations will commence shortly. The Corporation considers its labor relations to be good. 5 9 three-year agreement, which expires April 15, 1998. At the ferrous metal powder facilities in Tennessee, approximately 42 employees are covered by a four-year agreement which expires February 28, 2002. Approximately 20 employees at Suzorite are coverd by a three-year collective bargaining agreement that expires December 13, 1999. At Alumitech, approximately 28 employees are covered by two collective bargaining agreements, one agreement expiring April 30, 1998 and one agreement expiring December 31, 1998. The Corporation considers its labor relations to be good. FOREIGN OPERATIONS The Corporation's international operations are located in Canada whose institutions and governmental policies are generally similar to those of the United States. Although there can be no assurance as to future conditions, the Corporation has experienced no political activities, social upheavals, currency restrictions or similar factors which have had any material adverse effect to date on the results of its operations or financial condition. EXPORT SALES The Corporation's industrial minerals and metal products operations sell their products internationally to a wide variety of customers including the ceramics, glass and powder metallurgy industries. Export sales in these two segments were less than 8% of total sales.
EXECUTIVE AND OTHER OFFICERS OF THE REGISTRANT SERVED IN OFFICER POSITION AGE POSITION SINCE ------- -------- --- -------------- Peter Lawson-Johnston Chairman of the Board of Directors 71 1975 Richard L. Lister President and Chief Executive Officer 59 1993 Allen J. Palmiere Vice President, Chief Financial Officer and Assistant Secretary 45 1993 Peter J. Goodwin Vice President, Zemex Corporation President, Industrial Minerals 47 1994 Terrance J. Hogan President, Alumitech, Inc. 42 1995 George E. Gillespie President, Metal Powders 55 1997 Patricia K. Moran Corporate Secretary and Assistant Treasurer 32 1995
There are no family relationships between the officers listed above. The term of office of each executive officer is until his/her respective successor is elected and has qualified, or until his/her death, resignation or removal. Officers are elected or appointed by the board of directors annually at its first meeting following the annual meeting of shareholders. The following are the current officers of the Corporation and a description of their business activities if less than five years in their present position. 6 10 Mr. Lister, who was elected to the board of directors on May 30, 1991, assumed his duties as Vice Chairman of the Board of Directors on July 23, 1991 and as President and Chief Executive Officer on June 1, 1993. Mr. Lister was Vice Chairman of Dundee Bancorp Inc. from October 1991 to May 1993. Mr. Palmiere assumed the duties of Chief Financial Officer in October 1993. From April 1992 to October 1993 he was a self-employed consultant. Mr. Goodwin became a Vice President of the Corporation in August 1994. From May 1993 to August 1994, Mr. Goodwin was a self-employed consultant. Mr. Goodwin was President and Chief Executive Officer of Miller and Co. from August 1990 to May 1993. Mr. Hogan became President of Alumitech, Inc. in May 1995. Prior to becoming President, Mr. Hogan was Chief Operating Officer of Alumitech's subsidiary, Aluminum Waste Technology, Inc., from December 1992 to May 1995. Mr. Gillespie became President of the Metal Powders Group in April 1997. Prior to joining the Corporation, Mr. Gillespie was Chairman of the Operating Committee for three divisions of The Carborundum Company in 1996. Mr. Gillespie was Vice-President Refractories from 1993 to 1996 for The Carborundum Company. Ms. Moran assumed the duties of Corporate Secretary and Assistant Treasurer in May 1997. Prior to that time Ms. Moran served as Assistant Secretary-Treasurer since February 1995. Ms. Moran has been with the Corporation since 1993. CAUTIONARY "SAFE HARBOR" STATEMENT UNDER THE UNITED STATES PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 With the exception of historical matters, the matters discussed in this report are forward looking statements that involve risks and uncertainties that could cause actual results to differ materially from targeted or projected results. Factors that could cause actual results to differ materially include, among others, fluctuations in aluminum prices, problems regarding unanticipated competition, processing, access and transportation of supplies, availability of materials and equipment, force majeure events, the failure of plant equipment or processes to operate in accordance with specifications or expectations, accidents, labor relations, delays in start-up dates, environmental costs and risks, the outcome of acquisition negotiations and general domestic and international economic and political conditions, as well as other factors described herein or in the Corporation's filings with the Commission. Many of these factors are beyond the Corporation's ability to predict or control. Readers are cautioned not to put undue reliance on forward looking statements. ITEM 2. PROPERTIES The industrial minerals segment has operations and mines in Edgar, Florida; Monticello, Georgia; Boucherville, Quebec; Suzor Township, Quebec; Natural Bridge, New York; Murphy, North Carolina; Spruce Pine, North Carolina; Van Horn, Texas; and Benwood, West Virginia. This segment owns approximately 391,500 square feet of office and plant floor space. As well, the 60% owned processing facility in Benwood, West Virginia has approximately twelve acres of land. In 1996, The Feldspar Corporation purchased 655 acres which contain, at minimum, 20 years additional ore reserves for its Spruce Pine, North Carolina facility. The mineral deposits at the mines currently operated by the industrial minerals segment are estimated by the Corporation to be at least 25 years, except in the case of the mica mine in Suzor Township where reserves are estimated to be in excess of 100 years. All of the Corporation's mining properties are either owned or leased, with the leases expiring from 1999 to 2018. The metal products group has operations in Niagara Falls, New York; St. Marys, Pennsylvania; Greenback, and Maryville, Tennessee; Cleveland, Ohio; and Medina and Streetsboro, Ohio. At its facility in Niagara Falls, Pyron Corporation utilizes approximately 79,000 square feet of office and plant floor space which it leases from the Niagara County Industrial Development Agency. The lease was established as part of the Industrial Development Revenue Bond issued in November 1989 to finance the construction of an atomized steel -7- 11 powder plant. Lease payments are to be sufficient to pay the debt service on the Industrial Development Revenue Bond. The atomized plant utilizes approximately 16,000 square feet of floor space and is adjacent to the existing facility. The blending plant in St. Marys, Pennsylvania, which was built in 1995, has 32,000 square feet of plant, office and storage space and is situated on 3.4 acres of land. The Greenback facility is situated on 27.5 acres of land of which 6 acres is actively used in the operations. The Maryville facility is a leased facility which utilizes approximately 23,000 square feet of office and plant floor space. General office space comprises approximately 6,300 square feet; there is approximately 87,000 square feet of production, storage and shipping/receiving space. The aluminum dross processing plant in Cleveland, Ohio owns 6.1 acres and has buildings totaling 51,000 square feet. The Streetsboro, Ohio operation leases approximately 60% of a 36,000 square foot building, which it uses for its plant and office space. The Medina facility is leased and includes 19,000 square feet of plant and office space. All facilities are maintained in good operating condition. ITEM 3. LEGAL PROCEEDINGS On February 11, 1993, The Feldspar Corporation and other non-affiliated companies were named as defendants in a civil action brought by Dryvit Systems, Inc. ("Dryvit") in the State of Rhode Island captioned Dryvit Systems, Inc. v. The Feldspar Corporation, Taggart Sand Products Corp., Surface Systems, Inc., The Morie Company, Inc., Eriez Magnetics, Inc., and Law Engineering, Inc., C.A. No. KC 93-108, State of Rhode Island, Kent. Dryvit alleges that between approximately 1985 and 1990, sand purchased from TFC and other suppliers utilized by Dryvit to manufacture exterior insulation finishes for the exterior of buildings developed rust stains because the sand contained pyrite and magnetic materials. Dryvit seeks unspecified monetary damages and costs, including the costs associated with the repair of the damaged structures. TFC denies such allegations and claims, and the Corporation believes that it is remote that this litigation will result in any material adverse effect to the Corporation's financial condition or results of operations. The Corporation strongly believes that this action is without merit; however, no assurance can be made as to the outcome of this litigation. Although the Corporation's primary insurer has attempted to limit its coverage, the Corporation believes that its primary and excess liability insurance is sufficient to cover any potentially unfavorable outcome. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. -8- 12 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Information responsive to this Item is set forth on page 26 of registrant's Annual Report to Shareholders for the year ended December 31, 1997 and is incorporated herein by reference. The Annual Report to Shareholders is included as Exhibit 13 to this Form 10-K Annual Report. The Annual Report to Shareholders, except for those portions thereof which are expressly incorporated by reference herein, is furnished for the information of the Commission and is not to be deemed "filed" as part of this Form 10-K report. ITEM 6. SELECTED FINANCIAL DATA Information responsive to this item is set forth on page 51 of the Annual Report to Shareholders and is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION Information responsive to this Item is set forth on pages 19 through 26 of the Annual Report to Shareholders and is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Financial statements responsive to this Item are set forth on pages 27 through 50 of the Annual Report to Shareholders and are incorporated herein by reference. The Supplementary Schedule required by this Item is set forth on page S-1 of this Form 10-K Annual Report. See Item 14. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. -9- 13 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information about the directors of the Corporation required by this item is located in the Corporation's Proxy Statement for the 1998 Annual Meeting to be filed within 120 days after the end of the fiscal year. Information about the Executive Officers of the Corporation required by this item appears in Part I, Item 1, of this Annual Report on Form 10-K*. ITEM 11. EXECUTIVE COMPENSATION The information required by this item appears in the Corporation's Proxy Statement for the 1998 Annual Meeting to be filed within 120 days after the end of the fiscal year. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item appears in the Corporation's Proxy Statement for the 1998 Annual Meeting to be filed within 120 days after the end of the fiscal year. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item appears in the Corporation's Proxy Statement for the 1998 Annual Meeting to be filed within 120 days after the end of the fiscal year. - - ------------------ * Reference in this Annual Report on Form 10-K to material contained in the Corporation's Proxy Statement for the 1998 Annual Meeting to be filed within 120 days after the fiscal year incorporate such material into this Report by reference. -10- 14 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K 1. Financial statements and independent auditor's report filed as part of this report: (a) Consolidated Balance Sheets at December 31, 1997 and 1996, which information is incorporated by reference under Item 8 of this report; (b) Consolidated Statements of Shareholders' Equity for the three years ended December 31, 1997, which information is incorporated by reference under Item 8 of this report; (c) Consolidated Statements of Income for the three years ended December 31, 1997, which information is incorporated by reference under Item 8 of this report; (d) Consolidated Statements of Cash Flows for the three years ended December 31, 1997, which information is incorporated by reference under item 8 of this report; (e) Notes to the Consolidated Financial Statements, which information is incorporated by reference under Item 8 of this report; and (f) Independent Auditors' Report, which information is incorporated by reference under Item 8 of this report. 2. Financial statement schedules and independent auditors' report filed as part of this report: SCHEDULE NUMBER DESCRIPTION - Report of Independent Accountants Schedule IX Valuation and Qualifying Accounts and Reserves (page S-1) All other financial statements and schedules not listed have been omitted since the required information is included in the consolidated financial statements or the related notes thereto, or is not applicable or required. With the exception of the aforementioned financial statements and schedule, and the information incorporated in Items 1 and 2 and Items 5 through 8, the 1997 Annual Report is not deemed to be filed as part of this Annual Report on Form 10-K. Schedules not included in this Form 10-K have been omitted because they are not applicable or the required information is shown in the financial statements in the 1997 Annual Report or notes related thereto. -11- 15 3. EXHIBITS (3)(a) Certificate of Incorporation (Incorporated by reference from Exhibit 4(a) of the Corporation's Registration Statement on Form S-2, Registration No. 33-7774, filed on August 5, 1986) (3)(b) By-Laws (Incorporated by reference from Exhibit 3 of the Corporation's Quarterly Report on Form 10-Q filed on May 13, 1988) (3)(c) Amended and Restated Certificate of Incorporation (Incorporated by reference from Exhibit A of the Corporation's Definitive Proxy Statement, filed on March 29, 1995) (4)(a) Indenture of Trust dated as of November 1, 1989 between Niagara County Industrial Development Agency and The Bank of New York as trustee for Pyron Corporation (Incorporated by reference from Exhibit (4)(a) of the Corporation's Annual Report on Form 10-K filed March 31, 1990) (4)(b) Agency Mortgage and Security Agreement dated as of November 1, 1989 from Pyron Corporation and Niagara County Industrial Development Agency to The Bank of New York (Incorporated by reference from Exhibit (4)(b) of the Corporation's Annual Report on Form 10-K filed March 31, 1990) (4)(c) Letter of Credit Reimbursement Agreement dated as of November 1, 1989 between Pyron Corporation and Chemical Bank (Incorporated by reference from Exhibit (4)(c) of the Corporation's Annual Report on Form 10-K filed March 31, 1990) (4)(d) First Amendment to Letter of Credit Reimbursement Agreement dated as of November 1, 1989 between Pyron Corporation and Chemical Bank (Incorporated by reference from Exhibit (4)(d) of the Corporation's Annual Report on Form 10-K filed March 31, 1990) (4)(e) Second Amendment to Letter of Credit Reimbursement Agreement dated as of March 15, 1995 between Pyron Corporation and Chemical Bank (Incorporated by reference from Exhibit (4)(e) of the Corporation's Annual Report on Form 10-K filed March 30, 1995) (4)(f) Bank Mortgage and Security Agreement dated as of November 1, 1989 from Pyron Corporation and Niagara County Industrial Development Agency to Chemical Bank (Incorporated by reference from Exhibit (4)(e) of the Corporation's Annual Report on Form 10-K filed March 31, 1990) (4)(g) Building Loan Agreement dated as of November 1, 1989 between Chemical Bank and Pyron Corporation (Incorporated by reference from Exhibit (4)(f) of the Corporation's Annual Report on Form 10-K filed March 31, 1990) (4)(h) Security Agreement dated as of November 1, 1989 between Pyron Corporation and Chemical Bank (Incorporated by reference from Exhibit (4)(g) of the Corporation's Annual Report on Form 10-K filed March 31, 1990) (4)(i) Corporate Guaranty dated as of November 1, 1989 from Zemex Corporation to Chemical Bank (Incorporated by reference from Exhibit (4)(h) of the Corporation's Annual Report on Form 10-K filed March 31, 1990) -12- 16 (4)(j) First Amendment to Corporate Guaranty dated as of November 1, 1989 of Zemex Corporation to Chemical Bank (Incorporated by reference from Exhibit (4)(i) of the Corporation's Annual Report on Form 10-K filed March 31, 1990) (4)(k) Second Amendment to Corporate Guaranty dated as of March 14, 1991 of Zemex Corporation to Chemical Bank (Incorporated by reference from Exhibit (4)(j) of the Corporation's Annual Report on Form 10-K filed March 31, 1991) (4)(l) Third Amendment to Corporate Guaranty dated as of February 25, 1992 of Zemex Corporation to Chemical Bank (Incorporated by reference from Exhibit (4)(m) of the Corporation's Annual Report on Form 10-K filed March 31, 1993) (4)(m) Fourth Amendment to Corporate Guaranty dated as of March 8, 1993 of Zemex Corporation to Chemical Bank (Incorporated by reference from Exhibit (4)(o) of the Corporation's Annual Report on Form 10-K filed March 31, 1993) (4)(n) Fifth Amendment to Corporate Guaranty dated as of March 15, 1995 of Zemex Corporation to Chemical Bank (Incorporated by reference from Exhibit (4)(n) of the Corporation's Annual Report on Form 10-K filed March 30, 1995) (4)(o) Loan and Security Agreement dated as of March 15, 1995 among Zemex Corporation and The Feldspar Corporation and NationsBank of Tennessee, N.A. and Chemical Bank and NationsBank of Tennessee, N.A., as Agent (Incorporated by reference from Exhibit (4)(p) of the Corporation's Annual Report on Form 10-K filed March 30, 1995) (4)(p) Amendment No. 1 dated as of March 12, 1997 to the Loan and Security Agreement dated as of March 15, 1995 among Zemex Corporation and The Feldspar Corporation and NationsBank of Tennessee, N.A. and Chemical Bank and NationsBank of Tennessee, N.A., as Agent *(10)(a) Key Executive Common Stock Purchase Plan (Incorporated by reference from Exhibit (10)(b) of the Corporation's Annual Report on Form 10-K filed March 31, 1991) (10)(b) Consent to Assignment of Lease and to Agreement Sublease, and permission to Make Payments dated November 7, 1978 each from Joberta Enterprises, Inc. to NL Industries, Inc. and The Feldspar Corporation (Incorporated by reference from Exhibit 10(pp) to the Corporation's Registration Statement on Form S-2, Registration No. 33-7774, filed on August 5, 1986) (10)(c) Additional Lease Agreement dated as of November 1, 1989 between Niagara County Industrial Development Agency and Pyron Corporation (Incorporated by reference from Exhibit (10)(ll) of the Corporation's Annual Report on Form 10-K filed March 31, 1990) *(10)(d) Subscription Agreement with Richard L. Lister dated November 26, 1991 (Incorporated by reference from Exhibit (5)(a) of the Corporation's Annual Report on Form 10-K filed March 31, 1992) (10)(e) Ligonier Purchase Agreement and Second Plan of Reorganization dated March 2, 1992 among Pyron Metal Powders, Inc., a wholly-owned subsidiary of Zemex Corporation, Purchaser, and Ligonier Powders, Inc., Seller (Incorporated by reference from Exhibit (5)(a) of the Corporation's Annual Report on Form 10-K filed March 31, 1993) 13 17 (10)(f) 1995 Stock Option Plan (Incorporated by reference from Exhibit B of the Corporation's 1995 Definitive Proxy Statement, filed on March 29, 1995) (10)(g) Stock Purchase Agreement dated August 10, 1993 between Zemex Corporation, Zemex Canada Inc., an Ontario corporation and a direct wholly-owned subsidiary of Zemex Corporation, Dundee Bancorp Inc., an Ontario corporation, and Dundee Bancorp International Inc., a Delaware corporation, and a direct wholly-owned subsidiary of Dundee Bancorp Inc., with respect to the acquisition of Suzorite Mica Products Inc. (Incorporated by reference from Exhibit 2 of the Corporation's Current Report on Form 8-K filed September 7, 1993) (10)(h) Capital Stock Purchase Warrant dated September 14, 1993 issued to Dundee Bancorp International Inc. pursuant to the Stock Purchase Agreement referred to in 10(m). (Incorporated by reference from Exhibit 4(a) of the Corporation's Current Report on Form 8-K filed September 7, 1993) (10)(i) Registration Rights Agreement dated September 14, 1993 between Zemex Corporation and Dundee Bancorp International Inc. (Incorporated by reference from Exhibit 4(b) of the Corporation's Current Report on Form 8-K filed September 7, 1993) (10)(j) Asset Purchase Agreement dated September 3, 1993 between U.S. Silica Company, The Feldspar Corporation and Zemex Corporation with respect to the sale of the Virginia aplite facility (Incorporated by reference from Exhibit 10(at) of the Corporation's Annual Report on Form 10-K filed March 31, 1994) (10)(k) Stock Purchase Agreement dated November 15, 1993 between Americo Malay Mineral Company and Zemex Corporation with respect to the sale of 2,500,002 common shares of Perangsang Pasifik Senderian Berhad, a corporation organized and existing under the laws of the Federal Republic of Malaysia (Incorporated by reference from Exhibit 10(au) of the Corporation's Annual Report on Form 10-K filed March 31, 1994) (10)(l) Suzorite Mica Product Inc.'s Mining Lease dated August 25, 1975 between the Province of Quebec and Marietta Resources International Ltd. (Incorporated by reference from Exhibit 10(av) of the Corporation's Annual Report on Form 10-K filed March 31, 1994) (10)(m) Employee Stock Purchase Plan (Incorporated by reference as Exhibit A to the Corporation's Proxy Statement filed May 6, 1994) (10)(n) Stockholders Agreement dated June 10, 1994 among Alumitech, Inc., Clarion Capital Corporation, DCC Equities Limited and Moshe Dan Yerushalmi, John Hocevar and Terrance Hogan and Zemex Corporation (Incorporated by reference as Exhibit 10(ax) to the Corporation's Registration Statement on Form S-1, Registration No. 33-82638, filed on August 22, 1994) (10)(o) Asset Purchase Agreement dated December 7, 1994 between Whittaker, Clark & Daniels, Inc., Clark Minerals, Inc., Cherokee Minerals, Inc. and Pioneer Talc Company and Suzorite Mineral Products, Inc. and Zemex Corporation (Incorporated by reference from Exhibit 10(u) of the Corporation's Annual Report on Form 10-K filed March 30, 1995) (13) 1997 Annual Report to Shareholders 14 18 (22) Subsidiaries of the Registrant (24)(a) Consent of Deloitte & Touche (27) Financial Data Schedule The Corporation will furnish copies of these documents to requesting shareholders upon payment of $10.80 per document. * Management contract or compensatory plan or arrangement. 15 19 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ZEMEX CORPORATION By:/s/ RICHARD L. LISTER ------------------------------------- Dated: March 23, 1998 Richard L. Lister President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report is signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated:
SIGNATURE TITLE DATE - - --------- ----- ---- /s/ PETER LAWSON-JOHNSTON Chairman of the Board March 23, 1998 - - ----------------------------- and Director Peter Lawson-Johnston /s/ RICHARD L. LISTER President and March 23, 1998 - - ----------------------------- Chief Executive Richard L. Lister Officer and Director (Principal Executive Officer) /s/ PAUL A. CARROLL Director March 23, 1998 - - ----------------------------- Paul A. Carroll /s/ MORTON A. COHEN Director March 23, 1998 - - ----------------------------- Morton A. Cohen /s/ JOHN M. DONOVAN Director March 23, 1998 - - ----------------------------- John M. Donovan /s/ THOMAS B. EVANS, JR. Director March 23, 1998 - - ----------------------------- Thomas B. Evans, Jr.
16 20
SIGNATURE TITLE DATE - - --------- ----- ---- /s/ NED GOODMAN Director March 23, 1998 - - ---------------------------------------- Ned Goodman /s/ PATRICK H. O'NEILL Director March 23, 1998 - - ---------------------------------------- Patrick H. O'Neill /s/ WILLIAM J. VANDEN HEUVEL Director March 23, 1998 - - ---------------------------------------- William J. vanden Heuvel /s/ ALLEN J. PALMIERE Vice President, March 23, 1998 - - ---------------------------------------- Chief Financial Allen Palmiere Officer and Assistant Secretary (Principal Financial and Accounting Officer)
17 21 LIST OF EXHIBITS
EXHIBIT 13 1997 Annual Report to Shareholders EXHIBIT 22 Subsidiaries of the Registrant EXHIBIT 24(A) Report of Independent Accountants EXHIBIT 27 Financial Data Schedule
EX-13 2 EXHIBIT 13 1 Exhibit 13 ZEMEX CORPORATION 1997 ANNUAL REPORT Page 1 FINANCIAL HIGHLIGHTS
Years ended December 31 1997 1996 1995 ----------- ----------- ------------ SUMMARY OF OPERATIONS Net Sales $97,226,000 $86,420,000 $85,056,000 Earnings Before Interest, Tax, Depreciation & Amortization 15,877,000 7,305,000 12,111,000 Net Income 5,793,000 2,612,000 8,418,000 Capital Expenditures 16,584,000 16,426,000 15,451,000 ----------- ----------- ------------ FINANCIAL POSITION Working Capital $18,975,000 $18,688,000 $19,709,000 Shareholders' Equity 76,535,000 70,997,000 70,900,000 ----------- ----------- ----------- PER COMMON SHARE Net Income - Basic $0.72 $0.33 $1.07 Net Income - Diluted 0.70 0.32 1.03 Earnings Before Interest, Tax, Depreciation & Amortization 1.96 0.92 1.54 Shareholders' Equity 9.04 8.59 8.49 ---------- ----------- ----------- COMMON SHARES Average Common Shares Outstanding 8,097,642 7,937,379 7,843,992 Common Shares Issued and Outstanding at Year End 8,463,491 8,269,099 8,355,722 ---------- ------------ -----------
Note: all dollar amounts shown herein are in U.S. dollars TABLE OF CONTENTS To Our Shareholders 2 Industrial Minerals 6 Metal Powders 10 Alumitech 14 Management's Discussion and Analysis 19 Independent Auditors' Report 27 Management's Report 28 Audit Committee Report 28 Financial Statements 29 Notes to Financial Statements 33 Selected Financial Data 51
2 PAGE 2 - - ------------------------------------------------------------------------------- TO OUR SHAREHOLDERS - - ------------------------------------------------------------------------------- The year 1997 was a good year for Zemex; not only did the Corporation return to accelerated levels of profitability but, equally important, we accomplished the task of strategically positioning each of our operating divisions for the future. Additionally, we refined our focus to be a quality supplier of first line products to the North American industrial base. During the year, we improved the efficiencies of our production units and expect that further gains will be evident in 1998 and beyond. We continue to make solid progress in the area of research and development to ensure that our products and processes keep us at the forefront of the markets we serve. We believe that the implementation of process innovations and the introduction of new products should make significant contributions to the future profitability of the Corporation. INDUSTRIAL MINERALS Overall, the industrial minerals group had a solid year. The continued improvement of this group was due in large part to the strategic initiatives put in place as part of the 1996 reorganization, namely combining the feldspar, talc and mica operations into one division, and restructuring and augmenting the management and marketing teams. We believe that this reorganization, when combined with our new marketing approach that focuses on market segments rather than product lines, will successfully take the minerals group into the new millennium. Our mica operations closed off 1997 with a very strong year, successfully maintaining their margins in spite of price pressures in the marketplace. This was accomplished by the implementation of a well laid out plan for efficiency improvements, both in the mining area and in the processing facility. The results of this plan have been exceptional. At our Spruce Pine feldspar operation, the additional capacity, which was installed over the past few years, has aided in meeting increased market demand. At the same time, the efficiency of that operation has improved considerably, although not yet to the degree anticipated. Our Monticello, Georgia plant saw significant volume growth in potassium feldspar due to a concerted sales effort initiated two years ago and a 3 Page 3 revised approach to this market. The Georgia group also made great strides to reduce production costs and, as a result, had a very successful year. Additionally, sales of clay from our operation in Edgar, Florida also increased; this increase, when combined with a reduction of costs, served to improve the Florida plant's overall contribution margin. Over the past three years, the industrial minerals group has directed considerable time and resources to improving the performance of its talc operations and is now starting to see the benefits. Our Benwood, West Virginia operations improved substantially in 1997, particularly towards the end of the year, due in large part to the acceptance of its recently introduced ultra-fine talc products. To further accelerate the growth of our talc business, in March 1998, our industrial minerals group entered into a joint venture with Industria Mineraria Fabi S.r.l. ("Fabi"), a leading talc supplier based in Milan, Italy. This joint venture is the first in a series of steps towards globalization of our talc business and will result in the worldwide introduction of new products employing Fabi's technology. Earlier in 1998, our industrial minerals group announced the acquisition of Aspect Minerals, Inc., a muscovite mica producer with two facilities located very close to our Spruce Pine, North Carolina feldspar plant. Some of the by-product mica currently produced by our feldspar operations in Spruce Pine will be further processed and upgraded using these newly acquired facilities. Muscovite mica serves markets complementary to those currently served by our phlogopite mica. The industrial mineral group's revenue growth has come primarily from increased volumes, as opposed to increased prices, reflecting diligent efforts to improve the efficiency of the operations. By the close of the year, the industrial mineral group had shown cost improvements in most of the grades produced. We believe our minerals facilities are now poised to meet the expanded needs of the marketplace and to benefit from the efficiencies that have resulted from the capital infused over the past few years. ALUMITECH Alumitech's operating performance in 1997 showed significant improvement over 1996, due primarily to increased throughput, better aluminum recovery, and higher aluminum pricing. The results from Alumitech are even more gratifying given the periodic dislocation in day-to-day operations that occurred as a result of the construction of its new non-metallic product ("NMP") processing facility. The 60% growth in the sales of ceramic fiber components is due in part to the acquisition of the assets of Schaefer Brothers, Inc., a regional manufacturer of ceramic fiber heat containment systems. This acquisition has enabled Alumitech to further penetrate the ceramic fiber market, and will serve to strengthen its understanding of the end use markets. Schaefer Brothers and Engineered Thermal Systems, Inc. have been combined into ETS Schaefer Corporation, a wholly-owned division of Alumitech. 4 PAGE 4 In August 1997, Alumitech entered into a joint venture agreement with Thermal Ceramics, Inc. with respect to the fiber manufacturing operation located in Streetsboro, Ohio belonging to ETS Schaefer. The joint venture includes a development agreement between Thermal Ceramics and Alumitech that will allow Alumitech to gain more insight into the use of NMP in products directed to the refractory ceramic fiber industry. The fiber manufacturing facility, originally purchased in 1994 as part of our acquisition of Engineered Thermal Systems, Inc., was acquired so that we could develop the ability to utilize the NMP produced from our proprietary dross recycling process and optimize its use as feedstock in refractory ceramic fiber products. This new joint venture offers the best of all worlds in that it gives us further knowledge of the refractory ceramic fiber industry and allows us to focus our endeavors on the production of feedstock for that industry. Alumitech has made significant progress towards reaching its longer term objective of building several large-scale facilities for the reprocessing of dross materials into commercially utilizable products. In the past year, Alumitech refined its process and initiated construction of an NMP conversion facility at its Cleveland location. Upon completion of this new facility, Alumitech will have the ability to convert up to 90% of its available NMP into calcium aluminate, which can be used as feedstock for ceramic fiber and other industrial products. Alumitech remains a bright star in the Corporation's future despite the fact that it is behind schedule with respect to these plans. Pilot tonnages of calcium aluminate were made during the year and shipped to a number of customers for evaluation; the initial feedback was very positive. Completion of the project has been delayed due to equipment design, testing, and availability. Small commercial volumes of calcium aluminate should be available in the first half of 1998 and it is anticipated that the new facility will be ready for full-scale operation by mid-1998. We expect that the start-up period for this facility may see lower than scheduled production as the process is fine-tuned. However, given the accolades our calcium aluminate product has received from customers during initial testing, we believe that the new product should contribute good margins for the Corporation and become the way of the future for dross processing. METAL POWDERS Our metal powders group has undergone a significant reorganization with the retirement of its past president, G. Russell Lewis, and the appointment of his successor, George E. Gillespie. Mr. Lewis was connected with the metal powders operation for many years and is owed a great debt of gratitude for his past leadership. In 1997, our metal powders group began to reap the rewards of a new strategy, which was initiated in 1996, to reposition the group as a producer of higher value-added products. The success of this program was evidenced by the successful development and introduction of manganese sulfide and molybdenum alloy materials. These new products, and our continuing focus on developing other specialty metal powder products, are expected to enhance the future growth and profitability of our powdered metals group. 5 PAGE 5 Our metal powders blending facility, which opened for business in 1996 in St. Marys, Pennsylvania, has firmly established itself as a provider of value-added goods and services. In addition to custom blending our own metal powders, this facility also acts as a custom blender of ancillary products and offers blending services for powder metallurgy users in the area. Despite the progress made at the Niagara Falls, New York facility and the blending plant in St. Marys, our powder metals group is still faced with the ongoing challenge of its non-ferrous operations. The plants in Maryville and Greenback, Tennessee continue to be plagued by the volatility of copper pricing, |high costs, and lower than acceptable margins. Plans were initiated in 1997 to improve the efficiency of the non-ferrous operations by concentrating on the most profitable product lines and removing others based on cost effectiveness; the implementation of this program has seen some improvement in the non-ferrous group's margins. OUTLOOK In 1998, we will continue to focus on providing value and quality to our customers and introducing new and innovative products while, at the same time, maintaining price competitiveness. We will continue to invest in research and development in order to ensure that our products keep us one step ahead of our competition. In addition, we will continue to look for acquisitions and pursue opportunities for growth where we can be a market leader or a niche producer. It is through these means that we believe we can make significant contributions to the future profitability of the Corporation and enhance shareholder value. Over the past four years we have upgraded and expanded our facilities, procured premium ore reserves, and put together a team of highly capable individuals. With these facets in place, we believe that the Corporation is ready to meet the challenges of the future. As always, we are most grateful for the continued contribution of our board of directors, the support of our shareholders, and most particularly the outstanding endeavors of our employees. Richard L. Lister President and Chief Executive Officer Peter O. Lawson-Johnston Chairman 6 PAGE 6 ----------------------------------------------------------------- INDUSTRIAL MINERALS ----------------------------------------------------------------- In 1996, the Corporation's feldspar, talc and mica operations were combined under a centralized management team to form Zemex Industrial Minerals ("ZIM"). The reorganization also saw changes made to ZIM's marketing strategy, focusing its approach on market segments rather than product lines, which enables it to better serve the needs of its customers. As part of this reorganization, several new individuals were hired to fill key management, operating, and sales and marketing positions thus giving ZIM a stronger foundation from which to build and focus on its future growth and profitability. With its reorganization completed, ZIM's objectives for 1997 were twofold: to return to improved levels of profitability and to solidify its market position as the major supplier of quality industrial mineral products to niche markets. To achieve these goals, ZIM's sales and marketing team focused on increasing sales and improving customer satisfaction, while ZIM's production and engineering team implemented more rigorous quality and cost control programs at the operating level. Adhering to the philosophy "not a penny more", all of ZIM's employees were keenly aware that cost consciousness and operating efficiencies were at the forefront of the industrial mineral group's agenda in 1997. As a result of these efforts, ZIM raised its already high product performance and quality standards and significantly improved its volumes and operating margins. The industrial minerals group is dedicated to seeking further opportunities to improve margins in 1998 while continuing to enhance the quality of its products and services. As part of its original strategy to be a niche supplier of industrial mineral products, a grinding facility was acquired in Benwood, West Virginia in 1995 to augment the talc operations acquired in late 1994. In February 1998, Industria Mineraria Fabi S.r.l. ("Fabi"), a major talc supplier to the plastics industry in Europe and a highly regarded technological leader, became a partner in Benwood by acquiring a 40% interest in a new entity, Zemex Fabi-Benwood, LLC. As part of the transaction, ZIM contributed its Benwood facility and Fabi paid ZIM $3.4 million. This joint venture relationship will also allow ZIM exclusive access to Fabi's applications technology and the European polypropylene market to which Fabi is a leading supplier. The joint venture is the first step towards the globalization of ZIM's talc business and the introduction of a family of standardized worldwide talc products to serve the growing international plastics compounding market. As part of the joint venture, ZIM will have access to Fabi's Mount Seabroek talc deposit in Australia, an ore that exhibits very high purity and brightness. As a result of the joint 7 PAGE 7 PHOTOGRAPH 8 PAGE 8 PHOTOGRAPH 9 PAGE 9 venture, ZIM's talc product line will expand with the introduction of the Zemex Fabi-Benwood world products, enabling ZIM to provide additional high quality talc products to the North American plastics industry. This is a key step to the company's strategy of being a leading supplier of specialty talcs in North America. ZIM also produces low iron sand materials pursuant to a long-term exclusive contract from its newly constructed facility at Spruce Pine, North Carolina. This product, which is used in specialized glass applications and exotic lighting, can be produced in wet and dry forms. Currently, ZIM has qualified the wet material with its customer and is working towards qualifying the dry product. This low iron sand is a high margin product for the industrial minerals group and was expected to make a healthy contribution to 1997 earnings; unfortunately, due to the customer's slower than anticipated sales, this was not the case. ZIM's estimates for 1998 remain conservative, however, there is significant upside potential for this product. ZIM's other major products, which include sodium and potassium feldspar, clay, and phlogopite mica, also had successes in 1997 that are noteworthy. Sales of both clay and potassium feldspar were up significantly in 1997; sales of potassium feldspar, a product used in electrical porcelain, increased as a result of a change in market strategy that was implemented two years ago. This, coupled with improved mining and processing costs, contributed to a record year for ZIM's potassium feldspar business. Improvements in mining and processing costs were also made at ZIM's mica facility and have resulted in a dramatic improvement in the efficiency of that operation. ZIM's recently upgraded sodium feldspar facility located in Spruce Pine, North Carolina also had a good year. The emphasis at this facility during the year was, and continues to be, on improving operating efficiencies and product quality. Although ZIM continues to grow through internal expansion, it is actively pursuing acquisition opportunities synergistic to its businesses. In January 1998, ZIM announced that it had acquired the business of Aspect Minerals, Inc., a muscovite mica producer, for approximately $2.2 million, including the assumption of debt. The two facilities acquired in the purchase are located in the Spruce Pine, North Carolina area and are operated under the name Zemex Mica Corporation. These recently acquired facilities are located within close proximity of ZIM's feldspar plant in Spruce Pine where by-product muscovite mica is produced. This acquisition should create the opportunity to cost effectively add value to excess mica by-product and augment the company's existing mica business. Muscovite mica is marketed to the paint and plastics industries, the same markets ZIM currently serves with its mica, talc and barytes products. ZIM has come a long way since its reorganization in 1996, emerging as a well-regarded international supplier of industrial mineral products. In 1998, ZIM's objective is to continue refining its existing operations and to seek out further opportunities that will complement its core competencies and contribute to earnings. 10 PAGE 10 ----------------------------------------------------------------- METAL POWDERS ----------------------------------------------------------------- Zemex Corporation's metal powders group, recognized as one of North America's oldest metal powder producers, consists of two wholly-owned subsidiaries, Pyron Corporation and Pyron Metal Powders, Inc. (together "Pyron"). With four locations to serve its customer base, Pyron offers an extensive range of products and services to supply the powder metallurgy industry: hydrogen reduced sponge iron and atomized steel powders at its facility in Niagara Falls, New York; water and air atomized copper and non-ferrous alloys at its Maryville and Greenback, Tennessee operations; and customized powder blending at its plant in St. Marys, Pennsylvania. In 1997, Pyron redirected its efforts towards capitalizing on its high quality hydrogen reduced sponge iron products and developing and introducing new value-added products using its ferrous and non-ferrous atomizing processes. Pyron's focus on the development of new products and market segments began in late 1996 when market conditions indicated that it would be more advantageous for Pyron, given its unique production methods, to make this transition. Pyron's process is well suited to producing customized products that enhance customer value and efficiency. To effect this new strategy, Pyron's sales and marketing team has been totally recast and directed to optimizing product mix and customer value while at the same time keeping an eye on changing market conditions and potential opportunities. The Pyron team completed the implementation of the first phase of these new strategic initiatives in 1997; however, further measures will continue to be taken in 1998 and beyond to increase Pyron's return on investment and profitability. Powder metals manufactured by Pyron are used by fabricators to produce complex parts, such as brake shoes and gears. The process is commonly referred to as powder metallurgy (P/M). P/M is globally recognized for its value-added role in producing finished parts requiring little or no secondary processing and creating significant reductions in cycle time, cost and work in process when compared to parts made by more traditional processes such as casting and forging. According to industry reports, P/M's acceptance continues to grow, displacing other more established methods of production. The spill-over in application and acceptance of powder metals into markets that extend far beyond traditional P/M and friction applications holds particular promise for Pyron's unique products and services. Pyron's role as a supplier to its core markets, P/M and friction, continued to expand in 1997 with the successful introduction of several new products, product line extensions and services. One new product was Manganese Sulfide Plus (MnS+(TM)), a patent pending machinability enhancer developed by Pyron in 1996 and now commercially produced at Pyron's facility in Greenback, Tennessee. MnS+(TM) has gained 11 PAGE 11 PHOTOGRAPH 12 PAGE 12 PHOTOGRAPH 13 PAGE 13 widespread acceptance throughout the P/M industry as an additive to enhance tool life and aid in machinability. Running at near capacity, Pyron's MnS+a facility at Greenback, Tennessee has already undergone an expansion to meet current demand and improve service levels; another expansion is planned in 1998. Pyron is the only producer of manganese sulfide in the United States. Introduced in late 1997, Pyron Moly Alloys ("PMAs") are a family of molybdenum containing iron powders. As engineered powders, PMAs are designed to replace wrought material and extend P/M technology to applications where the design characteristics of wear resistance, hardness, and heat treatability are desirable. Typical applications where PMAs would be applied are in the production of gears and similar complex geometric parts. Pyron's PMAs have been sampled extensively by potential customers and production level orders have already been shipped. Initial evaluations of Pyron's most recently developed product, Ferro-Phosphorous or "Ferrophos" ("Fe3P"), are quite encouraging. This additive, when mixed with water atomized iron, enhances sintering and improves magnetic properties. Plans for 1998 include marketing commercial quantities of Fe3P to the P/M market. Pyron's St. Marys blending and service center, located in the geographic heart of the P/M industry, has firmly established itself as a provider of value-added goods and services to the local market. Pyron has used its strategic presence to provide an additional channel of distribution for its products, offering local blending services to its customers. Contract blending complements Pyron's core competencies and provides significant pull through opportunities. Although Pyron's non-ferrous water atomized copper facility at Greenback, Tennessee ran at high levels of capacity for the second half of 1997, its level of profitability continues to be an ongoing challenge. Water atomization results in a copper powder that is different in quality and, in many cases, more commercially desirable than products made by air atomization. Demand for the company's water atomized copper and related powders accelerated to the point where the Maryville, Tennessee facility was brought back on line in late 1997. It is anticipated that the additional capacity will further improve Pyron's cost position and profit contribution. As Pyron continues its change of direction, the successful strategic redeploying of assets and resources will be one of the fundamental drivers that will fuel its future growth. To support this effort, Pyron will continue to search for and serve markets that extend beyond its core powder metal and friction products. Identifying innovative process and product opportunities will also serve to round out efforts to add value. Operating efficiencies and cost reductions will ensure Pyron remains competitive and its products remain attractive in markets where competitive material challenges exist. These efforts will be supported by a corporate culture that fosters an environment of continuous product improvement for its customers. 14 PAGE 14 ----------------------------------------------------------------- ALUMITECH ----------------------------------------------------------------- Alumitech posted a number of major accomplishments in 1997. It set record production levels for the fifth consecutive year and increased sales of its heat containment systems and fiber products by over 60%. These factors, combined with improved aluminum metal recovery and higher aluminum metal prices, resulted in a strong performance in 1997 compared to 1996. In addition, Alumitech reached a major milestone in 1997 by successfully demonstrating commercialization of another new product, calcium aluminate, manufactured from non-metallic product ("NMP"), a by-product of its proprietary aluminum dross processing system. As part of its objective to commercialize production of calcium aluminate and other NMP-based products, construction of a new hydrometallurgical processing facility was started in 1997 at its Cleveland facility, Aluminum Waste Technology, Inc., and is now in the final phases of completion. Based on the success of Alumitech's new calcium aluminate in initial customer trials, demand for the product is anticipated to be strong. Initially, the primary target market for Alumitech's patented calcium aluminate product is the steel industry, where a critical component to making steel is the formation and control of slag in the steel making process. Calcium aluminate is used to treat molten steel in the ladle during the final stages of steel refinement, just prior to casting. The calcium aluminate produced by Alumitech is engineered to facilitate creation of an optimal slag to enable the steel maker to produce high quality steel in a minimal amount of time. Additionally, Alumitech's calcium aluminate is designed to protect the ladle's refractory lining from wear and tear during the refining operation. In February 1997, Alumitech, through its wholly-owned subsidiary, Engineered Thermal Systems, Inc., acquired the assets of Schaefer Brothers, Inc., a regional manufacturer of ceramic fiber-based heat containment systems located in Medina, Ohio. The Schaefer Brothers business was merged with Engineered Thermal Systems to form ETS Schaefer Corporation. As a result of the acquisition, Alumitech strengthened the fiber side of its business with additional technology, personnel and a complementary customer base. With its newly combined technology, ETS Schaefer now produces a wide range of products for containing heat in high temperature applications, such as industrial furnaces, ladle covers and various refractory preheaters. Using its patented attachment systems, the inherently poor mechanical strength of a ceramic fiber product can be transformed into a durable, long-lived lining that preserves the fiber's superior insulating properties. ETS Schaefer's linings are unmatched in effectiveness and performance. They are excellent insulators and are not subject to spalling, fracturing, and other limitations often associated with conventional refractories. In 1998, ETS Schaefer will 15 PAGE 15 [PHOTOGRAPH] 16 PAGE 16 [PHOTOGRAPH] 17 PAGE 17 concentrate on consolidating its operations into one location, and continue developing new applications and markets for its various products to further penetrate related fiber markets and industries. Alumitech's fiber manufacturing operations were originally purchased in 1994 to facilitate its research and development program on the usage of NMP as feedstock for refractory ceramic fiber applications. As this research was successfully concluded in 1996, Alumitech felt it was in its best long term interest to augment its ceramic fiber manufacturing capability and technology by forming a joint venture with Thermal Ceramics, Inc., a recognized producer of ceramic fiber and other refractories. The ceramic fiber manufacturing facilities were sold to this joint venture in August 1997. Under the terms of the agreement, Thermal Ceramics is responsible for the fiber manufacturing operations, while ETS Schaefer is the primary marketer of the fiber products produced by the joint venture. ETS Schaefer will continue to offer a full line of insulating fiber and related products, and design, manufacture and market its patented lines of heat containment systems, Monster Module(TM) and Perm+A+Lining(TM). The Alumitech/Thermal Ceramics joint venture agreement includes provisions for the development of new technology and uses for NMP recovered from recycling aluminum dross and saltcake in both hard and soft refractory applications. The joint development agreement gives Alumitech the opportunity to enhance the economics of certain refractories, to continue making significant improvements to broaden its products and services, and to substantially strengthen its access to technical expertise in the production of feedstock for the refractories industry. The completion of the new NMP production facility has taken longer than anticipated; however, when the full-scale commercialization of the NMP process comes on line in mid-1998, it has the potential to make a significant contribution to Alumitech. Once the NMP processing plant is in full operation, Alumitech's next step will be to expand its business through strategic alliances and the construction of new plants. Alumitech is currently evaluating a number of strategies and tactics to develop such opportunities and will pursue a path that will reap the greatest benefits for the Corporation. 18 PAGE 18 ----------------------------------------------------------------- FINANCIAL REVIEW ----------------------------------------------------------------- TABLE OF CONTENTS Management's Discussion and Analysis 19 Independent Auditors' Report 27 Management's Report 28 Audit Committee Report 28 Consolidated Statements of Income 29 Consolidated Balance Sheets 30 Consolidated Statements of Shareholders' Equity 31 Consolidated Statements of Cash Flows 32 Notes to the Consolidated Financial Statements 33 1.Summary of Significant Accounting Policies 33 2.Acquisitions and Dispositions 35 3.Inventories 37 4.Property, Plant and Equipment 37 5.Other Assets 38 6.Income Taxes 38 7.Pension Plans and Other Postretirement Benefits 40 8.Long Term Debt 41 9.Common Shares, Stock Options and Warrants 43 10.Reorganization Charges and Unusual Items 45 11.Operating Leases and Other Commitments 46 12.Quarterly Financial Data (Unaudited) 47 13.Financial Instruments 47 14.Changes in Non-Cash Working Capital Items 48 15.Related Party Transactions 48 16.Segment Information 48 17.Contingencies 50 18.Subsequent Events 50 19.Comparative Figures 50 Selected Financial Data 51
19 PAGE 19 ----------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS ----------------------------------------------------------------- The following is a discussion and analysis of the results of operations and financial condition of the Corporation for the years ended December 31, 1997, 1996 and 1995, and certain factors that may affect the Corporation's prospective financial condition and results of operations. The following should be read in conjunction with the Consolidated Financial Statements and related notes thereto. OVERVIEW The Corporation is a diversified producer of specialty materials and products for use in a variety of industrial applications. The Corporation operates in two principal business segments: (i) industrial minerals, which includes The Feldspar Corporation, Suzorite Mica Products Inc. and Suzorite Mineral Products, Inc.; and (ii) metal products, which includes Pyron Corporation, Pyron Metal Powders, Inc. and Alumitech, Inc. The financial performance of the Corporation was significantly better in 1997 than in 1996. Net sales were up 12.5% but, more importantly, the gross margin improved from 23% in 1996 to 27% in 1997. This was partially as a result of the focus on operational efficiency and cost control. In August 1997, the Corporation entered into an agreement with respect to Alumitech, Inc.'s fiber manufacturing operation located in Streetsboro, Ohio. Under the agreement, the fiber line was sold to a new corporation in which Alumitech, Inc. retained an interest. The one-time gain, when netted against certain other non-recurring items, resulted in other income of $1.6 million. During the first quarter of 1996, the Corporation recognized reorganization costs of $1.8 million in connection with the reorganization of its industrial minerals division, a write-down to market of inventory held in Brazil and the recognition of a provision for anticipated costs associated with storing and selling the material. The Brazilian enterprise was unsuccessful primarily due to rapidly deteriorating market prices which made market penetration extremely difficult. The Corporation's strategy going forward is to enhance its position as a leading supplier of specialty materials through investments in its core businesses, the introduction of new products, strategic acquisitions, and investments in new technologies. RESULTS OF OPERATIONS YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996 Net Sales
1997 1996 Change Change ----------- ----------- ----------- ------ Industrial Minerals $43,396,000 $40,469,000 $ 2,927,000 7.2% Metal Products 53,830,000 45,951,000 7,879,000 17.1% ----------- ----------- ----------- ----- $97,226,000 $86,420,000 $10,806,000 12.5% =========== =========== =========== =====
20 The Corporation's net sales for 1997 were $97.2 million, an increase of $10.8 million, or 12.5%, from 1996. Sales in the industrial minerals segment and the metal products group increased $2.9 million and $7.9 million, respectively. The industrial minerals segment recorded a 7.2% increase in sales from $40.5 million in 1996 to $43.4 million in 1997. The increase was primarily due to a $1.7 million increase from the feldspar group generated by a favorable product mix, and a $1.4 million increase in talc sales. Talc sales are expected to increase in 1998 as market share continues to increase. Feldspar sales to the sanitaryware industry should increase; however, uncertainty exists in the tile industry due to the devaluation of the Malaysian currency. Net sales of the metal products group increased 17.1%, or $7.9 million, from $46.0 million in 1996 to $53.8 million in 1997. Of the increase, approximately $1.3 million was due to an increase in the price of aluminum, $2.6 million was due to increased sales of ceramic fiber products, and $1.7 million was due to increased sales of ferrous metal powders. In 1998, modest sales growth in both metal powders and aluminum dross processing is anticipated. COST OF GOODS SOLD Cost of goods sold were $70.8 million in 1997 compared to $66.4 million in 1996. The corresponding gross margins were 27.2% for 1997 and 23.2% for 1996. The main increase came from the industrial minerals group where the gross margin increased from 27.1% to 34.2% as a result of production efficiencies and a favorable product mix. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative ("SG&A") expenses increased 15.9% from $10.5 million in 1996 to $12.2 million in 1997. As a percent of net sales, SG&A expense was 12.5% in 1997 as compared to 12.1% in 1996. The increase was due to increased staffing in the industrial minerals group, expenses associated with investigating potential acquisitions, and bonuses paid pursuant to the Corporation's management incentive program. DEPRECIATION, DEPLETION AND AMORTIZATION Depreciation, depletion and amortization increased by $1.2 million, or 25.1%, from $4.7 million in 1996 to $5.9 million in 1997. This increase was driven by the capital expenditures made by the Corporation over the past several years. Prospectively, depreciation will continue to increase as current capital programs are placed into service. OPERATING INCOME BEFORE REORGANIZATION CHARGES Operating income before reorganization charges was $8.4 million in 1997 compared to $4.8 million in 1996. A $1.8 million dollar reorganization charge was recognized in the first quarter of 1996 in connection with the reorganization of the Corporation's industrial minerals division, a write-down to market of its Brazilian inventory, and a provision for storage costs and selling expenses in connection thereto. 21 PAGE 20 OPERATING INCOME Operating income increased from $3.1 million for fiscal 1996 to $8.4 million in fiscal 1997, representing a 173.1% increase. INTEREST EXPENSE, NET Interest expense for the year ended December 31, 1997 was $1.9 million, an increase of $1.0 million over 1996. During 1996, the interest expense relating to the expansion of the Spruce Pine facility was capitalized. During 1997, the project was completed and, accordingly, the related interest was expensed. Total indebtedness decreased from $26.6 million in 1996 to $25.5 million in 1997. OTHER, NET In 1997, the Corporation recognized other net income of $1.6 million. The largest component of this revenue was generated by a one-time gain on the sale of Alumitech, Inc.'s fiber line. PROVISION FOR (RECOVERY OF) INCOME TAXES The provision for income taxes for the fiscal year 1997 was $2.3 million as compared to a tax recovery of $0.9 million in 1996. The 1996 tax recovery reflected the recognition of the benefit of net operating losses available to the Corporation. In 1998 and beyond, the Corporation will use a tax rate of approximately 30% to calculate its income taxes, reflecting the permanent difference arising from the application of percent depletion to income derived from extractive industries. NET INCOME AND EARNINGS PER SHARE As a result of the factors discussed above, net income for the year ended December 31, 1997 was $5.8 million, an increase of $3.2 million from 1996.
1997 1996 ---------- ---------- Net Income $5,793,000 $2,612,000 Earnings Per Share - Basic $ 0.72 $ 0.33 Earnings Per Share - Diluted $ 0.70 $ 0.32 ---------- ----------
22 PAGE 22 RESULTS OF OPERATIONS YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995 Net Sales
1996 1995 Change Change ----------- ----------- ------------ ------ Industrial Minerals $40,469,000 $37,089,000 $ 3,380,000 9.1% Metal Products 45,951,000 47,967,000 (2,016,000) (4.2%) ----------- ----------- ----------- ----- $86,420,000 $85,056,000 $ 1,364,000 1.6% ----------- ----------- ----------- -----
The Corporation's net sales for 1996 were $86.4 million, an increase of $1.4 million, or 1.6%, from 1995. The major components of the increase were: the full year consolidation of Alumitech, Inc. and increased industrial minerals sales of $3.4 million, offset by decreased metal powder sales of $2.7 million. The industrial minerals segment recorded a 9.1% increase in sales from $37.1 million in 1995 to $40.5 million in 1996. The increase was due to a $1.7 million increase from the feldspar group, a $1.2 million increase in the talc group's sales and a $0.5 million increase in sales of phlogopite mica. The increase in talc sales was largely due to the inclusion of a full year's sales from the Benwood facility, which was acquired in May 1995. Net sales of the metal products group decreased 4.2%, or $2.0 million, from $48.0 million in 1995 to $46.0 million in 1996. Of this decrease, $2.1 million was primarily due to lower copper prices and slightly lower volume of copper sales affecting sales at Pyron Metal Products, Inc. as a well as a $1.3 million decline in atomized steel sales. These decreases were offset in part by increased sales of $0.7 million from Alumitech, Inc. Sponge iron sales increased by 2.3% while atomized steel sales decreased 21.2%. COST OF GOODS SOLD Cost of goods sold were $66.4 million in 1996 compared to $64.4 million in 1995. The corresponding gross margin was 23.2% for 1996 and 24.3% for 1995. The decline in gross margin was primarily due to lower aluminum prices. The decline in aluminum prices realized in 1996 compared to 1995 resulted in margin erosion of 1.8%, offsetting a slight improvement achieved by the other groups. In addition, cost of goods sold was negatively affected by the write-down of parts and supplies that had been rendered obsolete as the result of the expansion of the sodium feldspar plant at Spruce Pine, North Carolina. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES SG&A expenses increased 21.0% from $8.7 million in 1995 to $10.5 million in 1996. As a percent of sales, SG&A expense was 12.1% in 1996 as compared to 10.2% in 1995. The increase was the result of the full year consolidation of Alumitech, Inc. and the addition of sales and marketing staff for the industrial minerals segment. 23 PAGE 23 DEPRECIATION, DEPLETION AND AMORTIZATION Depreciation, depletion and amortization increased by $1.0 million, or 27.2%, from $3.7 million in 1995 to $4.7 million in 1996. This increase results from the 19.4% net increase in property, plant and equipment during 1996 as a result of capital expenditures. OPERATING INCOME BEFORE REORGANIZATION CHARGES Operating income before reorganization charges was $4.8 million in 1996 compared to $8.3 million in 1995. A $1.8 million reorganization charge was recognized in the first quarter of 1996 in connection with the reorganization of the Corporation's industrial minerals division, a write-down to market of its Brazilian inventory, and the recognition of a provision for storage costs and selling expenses in connection thereto. OPERATING INCOME Operating income decreased to $3.1 million for fiscal 1996 from $8.3 million in fiscal 1995, representing a 63.2% decline. This decline was due to reasons discussed previously. INTEREST EXPENSE, NET Net interest expense for the year ended December 31, 1996 was $0.9 million, an increase of $0.4 million over 1995. This was attributable to an increase in total indebtedness from $13.1 million in 1995 to $26.6 million in 1996. OTHER, NET In 1996, the Corporation recognized other net expense of $0.5 million. The largest component of this expense was a $0.7 million provision relating to a property which the Corporation had sold and on which the purchaser had defaulted. The offset was a number of small income items which reduced the total expense. RECOVERY OF INCOME TAXES In 1996, the Corporation realized an income tax recovery of $0.9 million as compared to a recovery of $0.5 million in 1995. The recoveries reflect the recognition of the benefit of net operating losses available to the Corporation. NET INCOME AND EARNINGS PER SHARE As a result of the factors discussed above, net income for the year ended December 31, 1996 was $2.6 million, a decrease of $5.8 million from 1995.
1996 1995 ---------- ---------- Net Income $2,612,000 $8,418,000 Earnings Per Share - Basic $ 0.33 $ 1.07 Earnings Per Share - Diluted $ 0.32 $ 1.03 ---------- ----------
24 PAGE 24 LIQUIDITY AND CAPITAL RESOURCES The Corporation has historically funded its extraction and processing activities through cash flow from operations, bank debt and sales of capital stock and warrants. During the most recent three-year period ended December 31, 1997, the Corporation funded all capital expenditures, acquisitions and debt reduction from a combination of additional debt, and cash flow from operations. In addition, during 1995, outstanding warrants were exercised which resulted in net proceeds of $4.8 million. These funds were utilized to repay long term debt, fund acquisitions and purchase treasury stock. cash flow from operations The Corporation had $19.0 million of working capital at December 31, 1997, compared to $18.7 million at December 31, 1996. During 1997, the Corporation generated cash flow from operations of $13.5 million as compared to $6.0 million for 1996. The increase of $7.5 million is primarily due to higher operating income in the 1997 period and a one-time gain realized on the sale of Alumitech, Inc's. dormant fiber line. In 1997, non-cash working capital items generated $3.7 million of the cash otherwise generated from operations as compared to $0.5 million used in the corresponding period of 1996 as a result of a decrease in inventories and prepaid expenses and an increase in accounts payable, accrued liabilities and accrued income taxes. FINANCING AGREEMENTS In March 1997, the Corporation amended its credit facility to increase the total availability to $50,224,000. The credit facility is further subdivided into four facilities: (i) a $30,000,000 revolving credit facility; (ii) a $10,000,000 multiple advance term loan facility; (iii) a $5,224,000 standby letter of credit; and (iv) a $5,000,000 operating line. These facilities are secured by specific assets and a floating charge over the Corporation's assets. The facilities bear interest at rates varying from bank prime to bank prime plus 0.25% and from LIBOR plus 1.25% to LIBOR plus 2.25%, depending upon certain financial tests. As at December 31, 1997, there was $3,000,000 outstanding under the operating line, $8,056,000 outstanding under the multiple advance term loan facility, $10,000,000 outstanding under the revolving credit facility, and the standby letter of credit was issued to secure the Corporation's Industrial Development Revenue Bond. The operating line matures June 30, 1998 and is reviewed annually for purposes of renewal. The multiple advance term loan facility requires quarterly payments of $278,000 with the balance outstanding, if any, due January 1, 2000. CAPITAL EXPENDITURES The Corporation's primary capital activities in the past involved the acquisition and development of industrial mineral properties and facilities, and capital investments to expand its facilities, increase operating efficiencies, and meet environmental, health and safety standards at its existing operations. During 1997, capital expenditures were $16.6 million compared to $16.4 million and $15.5 million for 25 PAGE 25 the years ended December 31, 1996 and 1995, respectively. The capital expenditures were funded by cash flow from operations and bank indebtedness. The Corporation is currently implementing and/or planning several major capital programs. These include retrofitting of the aluminum dross plant in Cleveland. In aggregate, 1998 capital expenditures are anticipated to be approximately $14.1 million. The Corporation plans on funding these expenditures from a combination of cash flow from operations and credit facilities. Although the Corporation's capital budgets provide for certain reclamation and environmental compliance activities, management does not believe that the cost of the Corporation's environmental compliance will have a material adverse effect on the Corporation's results of operations or financial condition in 1998. SUBSEQUENT EVENTS In January 1998, the Corporation acquired a muscovite mica producer for approximately $2,200,000, which includes the assumption of debt. The acquisition was financed by drawing down on the Corporation's credit facility. In addition, in February 1998, the Corporation effected the sale of 40% of its talc facility located in Benwood, West Virginia to Industria Mineraria Fabi S.r.l. for $3,400,000. SEASONALITY AND INFLATION Although the Corporation's results from extraction and processing operations are cyclical due to fluctuations in industrial minerals and metal products demands, sales of the Corporation's products are generally not seasonal. Inflation in recent years has not adversely affected the Corporation's results of operations and is not expected to adversely affect the Corporation in the future unless it grows substantially and the markets for industrial minerals and metal products suffer from a negative impact on the economy in general. 26 PAGE 26 YEAR 2000 The Corporation operates in basic industries that do not rely heavily on computerized systems. The major systems operated by the Corporation are those for financial reporting all of which are year 2000 compliant. It is the opinion of management that any year 2000 issues that may arise will not be significant and will not have a material adverse impact on the financial performance of the Corporation. The Corporation has initiated a review of key suppliers to determine their exposure to problems arising from Year 2000. The review is being conducted by management personnel and additional resources are not required. MARKET RISK Market risk represents the risk of loss that may impact the consolidated financial statements of the Corporation due to adverse changes in financial market prices and rates. The Corporation's market risk is primarily the result of fluctuations in interest rates and aluminum prices. Management monitors the movements in interest rates and performs sensitivity analysis on aluminum prices and, on that basis, decides on the appropriate measures to take. Prices and interest rates are such that no measures need be taken at this time. The Corporation does not hold or issue financial instruments for trading purposes. A discussion of the Corporation's financial intstruments is included in the financial instruments note to the Consolidated Financial Statements. CAPITAL STOCK Zemex Corporation's common shares are traded on the New York Stock Exchange under the symbol ZMX. The price range in which the shares have traded for the past two years is shown below: COMMON SHARE PRICES
1997 Q1 Q2 Q3 Q4 Year ---- ----- ----- ----- ------- ------ High $7.75 $8.00 $9.50 $10.94 $10.94 Low 6.75 6.75 7.88 7.94 6.75 Close 6.75 7.75 9.50 8.75 8.75 ----- ----- ----- ------ ------
1996 Q1 Q2 Q3 Q4 Year ---- ------ ----- ----- ----- ------ High $10.00 $9.63 $8.13 $8.88 $10.00 Low 8.88 7.50 6.88 7.00 6.88 Close 9.13 7.63 7.75 7.00 7.00 ------ ----- ----- ----- ------
In the fourth quarter of each of 1997, 1996 and 1995, the Corporation declared a 2% stock dividend. As of December 31, 1997, there were approximately 1,782 holders of record of the Corporation's common shares. This number includes shares held only in nominee name and, thus, does not reflect the number of holders of a beneficial interest in the shares. 27 PAGE 27 INDEPENDENT AUDITORS' REPORT To the Shareholders and Board of Directors of Zemex Corporation We have audited the accompanying consolidated balance sheets of Zemex Corporation and its Subsidiaries as of December 31, 1997 and 1996 and the related consolidated statements of income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the consolidated financial position of Zemex Corporation and its Subsidiaries as of December 31, 1997 and 1996 and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles in the United States. Deloitte & Touche Chartered Accountants Toronto, Ontario February 6, 1998 except for Note 18(ii) as to which the date is February 24, 1998 28 PAGE 28 MANAGEMENT'S REPORT The management of Zemex Corporation and its subsidiaries has the responsibility for preparing the consolidated financial statements presented in this Annual Report and for their accuracy and integrity. The statements have been prepared in conformity with generally accepted accounting principles in the United States, and include informed judgments and estimates as required. Other financial information in this Annual Report is consistent with the financial statements. Zemex Corporation's system of internal controls is designed to provide reasonable assurance, at a justifiable cost, as to the reliability of financial records and reporting and the protection of assets. This system includes organizational arrangements with clearly defined lines of responsibility. Deloitte & Touche, independent auditors, have audited the consolidated financial statements of Zemex Corporation and their opinion is included on the preceding page. Zemex Corporation has formal standards of corporate conduct and policies regarding high standards of ethics and financial integrity. These policies have been disseminated to appropriate employees and internal control procedures provide reasonable assurance that violations of these policies, if any, are detected. Allen J. Palmiere Richard L. Lister Vice President and President and Chief Financial Officer Chief Executive Officer AUDIT COMMITTEE REPORT The Audit Committee of the Board of Directors is composed of three independent directors, Patrick H. O'Neill, Chairman, John M. Donovan, and Thomas B. Evans, Jr. The Committee held one meeting during 1997. The Audit Committee oversees the financial reporting process of the Corporation on behalf of the Board of Directors. In fulfilling its responsibility, the Committee recommended to the Board of Directors, subject to shareholder approval, the selection of the Corporation's independent auditors. The Audit Committee met with management and representatives of the auditors, Deloitte & Touche, to review accounting, auditing and financial reporting matters. The Committee met with Deloitte & Touche representatives without management present. Patrick H. O'Neill Chairman, Audit Committee 29 PAGE 29 CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31 ------------------------------------- 1997 1996 1995 ----------- ----------- ----------- NET SALES $97,226,000 $86,420,000 $85,056,000 COSTS AND EXPENSES Cost of goods sold 70,826,000 66,416,000 64,356,000 Selling, general & administrative 12,158,000 10,492,000 8,669,000 Depreciation, depletion & amortization 5,871,000 4,694,000 3,689,000 ------------ ----------- ----------- 88,855,000 81,602,000 76,714,000 Operating Income Before Reorganization Charges 8,371,000 4,818,000 8,342,000 Reorganization Charges (Note 10) -- 1,752,000 -- ------------ ----------- ---------- Operating Income 8,371,000 3,066,000 8,342,000 ------------ ----------- ---------- OTHER INCOME (EXPENSES) Interest expense, net (Note 8) (1,944,000) (948,000) (523,000) Other, net (Notes 2 and 10) 1,635,000 (455,000) 80,000 ------------ ----------- ---------- (309,000) (1,403,000) (443,000) ------------ ----------- ---------- Income Before Income Taxes 8,062,000 1,663,000 7,899,000 Provision for (recovery of) income taxes (Note 6) 2,269,000 (949,000) (519,000) ------------ ----------- ---------- Net Income $ 5,793,000 $ 2,612,000 $ 8,418,000 ------------ ----------- ---------- Net Income Per Share - Basic $ 0.72 $ 0.33 $ 1.07 Net Income Per Share - Diluted 0.70 0.32 1.03 ------------ ----------- ---------- Average Common Shares Outstanding 8,097,642 7,937,379 7,843,992 ------------ ----------- ----------
See Notes to the Consolidated Financial Statements 30 PAGE 30 ----------------------------------------------------------------- CONSOLIDATED BALANCE SHEETS -----------------------------------------------------------------
December 31 ---------------------------- 1997 1996 ------------ ------------- ASSETS Current Assets Cash and cash equivalents $ 2,189,000 $ 2,279,000 Accounts receivable (less allowance for doubtful accounts of $328,000 at December 31, 1997 and $452,000 at December 31, 1996)(Notes 2 and 15) 16,287,000 15,003,000 Inventories (Note 3) 17,595,000 18,171,000 Prepaid expenses 786,000 1,388,000 Deferred income taxes (Note 6) 1,328,000 1,013,000 ------------ ------------ 38,185,000 37,854,000 Property, Plant and Equipment (Notes 4 and 8) 70,812,000 62,084,000 Other Assets (Note 5) 9,777,000 9,438,000 ------------ ------------ $118,774,000 $109,376,000 ------------ ------------ LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Bank indebtedness (Note 8) $ 3,000,000 $ 6,590,000 Accounts payable 9,805,000 7,091,000 Accrued liabilities 3,151,000 2,983,000 Accrued income taxes 1,235,000 301,000 Current portion of long term debt (Note 8) 2,019,000 2,201,000 ------------ ------------ 19,210,000 19,166,000 Long Term Debt (Note 8) 20,527,000 17,797,000 Other Non-Current Liabilities 1,014,000 599,000 Deferred Income Taxes (Note 6) 1,488,000 817,000 ------------ ------------ 42,239,000 38,379,000 Shareholders' Equity Common stock (Note 9) 9,204,000 8,950,000 Paid-in capital 53,298,000 51,304,000 Retained earnings 24,235,000 20,040,000 Note receivable from shareholder (Note 9) (1,749,000) (1,749,000) Cumulative translation adjustment (1,588,000) (1,175,000) Treasury stock at cost (Note 9) (6,865,000) (6,373,000) ------------ ------------ 76,535,000 70,997,000 ------------ ------------ $118,774,000 $109,376,000 ------------ ------------
See Notes to the Consolidated Financial Statements 31 PAGE 31 - - ----------------------------------------------------------------- Consolidated Statements of Shareholders' Equity (in thousands) - - -----------------------------------------------------------------
Note Receivable Cumulative Common Paid-In Retained From Translation Treasury Stock Capital Earnings Shareholder Adjustment Stock Total ------- -------- -------- ----------- ----------- -------- ------- Balance at December 31, 1994 $7,221 $38,703 $11,668 $(1,749) $(1,326) (465) $54,052 Stock issued under employee stock purchase plan (a) 49 422 -- -- -- -- 471 Stock dividend (a) 167 1,233 (1,403) -- -- -- (3) Stock options and warrants exercised (a) 626 4,423 -- -- -- -- 5,049 Stock issued in connection with Alumitech purchase (b) 632 5,133 -- -- -- 834 6,599 Warrants repurchased (a) -- (222) -- -- -- -- (222) Stock purchased for treasury (a) -- -- -- -- -- (3,572) (3,572) Net income for the year -- -- 8,418 -- -- -- 8,418 Translation adjustment -- -- -- -- 108 -- 108 Balance at December 31, 1995 8,695 49,692 18,683 (1,749) (1,218) (3,203) 70,900 Stock issued under employee stock purchase plan (a) 73 535 -- -- -- -- 608 Stock dividend (a) 161 1,089 (1,255) -- -- -- (5) Stock options exercised (a) 21 84 -- -- -- -- 105 Stock purchased for treasury (a) -- -- -- -- -- (3,170) (3,170) Stock options repurchased -- (96) -- -- -- -- (96) Net income for the year -- -- 2,612 -- -- -- 2,612 Translation adjustment -- -- -- -- 43 -- 43 Balance at December 31, 1996 8,950 51,304 20,040 (1,749) (1,175) (6,373) 70,997 Stock issued under employee stock purchase plan (a) 75 528 -- -- -- -- 603,000 Stock dividend (a) 165 1,428 (1,598) -- -- -- (5) Stock options exercised (a) 14 205 -- -- -- -- 219 Stock purchased for treasury (a) -- -- -- -- -- (492) (492) Stock options repurchased -- (167) -- -- -- -- (167) Net income for the year -- -- 5,793 -- -- -- 5,793 Translation adjustment -- -- -- -- (413) -- (413) Balance at December 31, 1997 $9,204 $53,298 $24,235 $(1,749) $(1,588) $(6,865) $76,535
See Notes to the Consolidated Financial Statements (a) See Note 9 (b) See Note 2 32 PAGE 32 ----------------------------------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS -----------------------------------------------------------------
Years ended December 31 ---------------------------------------- 1997 1996 1995 ---------- ----------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 5,793,000 $ 2,612,000 $ 8,418,000 Adjustments to reconcile net income from operations to net cash flows from operating activities Depreciation, depletion & amortization 5,871,000 4,694,000 3,689,000 Amortization of deferred financing costs1 147,000 101,000 65,000 Loss on assets held for resale -- -- 61,000 Decrease in deferred income taxes 356,000 (1,761,000) (122,000) Share of net income of investee -- -- (87,000) (Gain) loss on sale of property, plant and equipment( 1,831,000) 255,000 22,000 (Increase) decrease in other assets (957,000) 670,000 (227,000) Increase (decrease) in non-current liabilities 415,000 (6,000) 56,000 Changes in non-cash working capital items(a) 3,709,000 (533,000) (4,660,000) ------------ ----------- ----------- Net cash provided by operating activities 13,503,000 6,032,000 7,215,000 ------------ ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES Additions to property, plant & equipment (16,584,000) (16,426,000) (15,451,000) Assets acquired in connection with acquisitions (b) -- -- (3,658,000) Proceeds from sale of assets 3,939,000 86,000 -- ------------ ----------- ----------- Net cash used in investing activities (12,645,000) (16,340,000) (19,109,000) ------------ ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES (Payments) proceeds net, on bank indebtedness (3,590,000) 3,370,000 3,040,000 Proceeds from long term debt 5,717,000 12,882,000 6,219,000 Repayment of long term debt (3,169,000) (2,747,000) (5,343,000) Deferred financing costs -- - (467,000) Cash paid in lieu of fractional shares (5,000) (5,000) (3,000) Issuance of common stock (c) 679,000 713,000 5,520,000 Purchase of common stock, options and warrants for treasury (c) (516,000) (3,266,000) (3,794,000) ------------ ----------- ----------- Net cash (used in) provided by financing activities (884,000) 10,947,000 5,172,000 ------------ ----------- ----------- EFFECT OF EXCHANGE RATE CHANGES ON CASH (64,000) (13,000) 32,000 NET (DECREASE) INCREASE IN CASH (90,000) 626,000 (6,690,000) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 2,279,000 1,653,000 8,343,000 CASH AND CASH EQUIVALENTS AT END OF YEAR $ 2,189,000 $ 2,279,000 $ 1,653,000 ------------ ----------- ----------- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Income taxes paid $ 821,000 $ 393,000 $ 303,000 Interest paid 2,412,000 937,000 656,000 SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES Stock issued in connection with acquisition (b) $ -- $ -- $ 6,599,000 Notes received in connection with sale of assets held for resale(b)(d) 2,274,000 -- 423,000 ------------ ----------- -----------
See Notes to the Consolidated Financial Statements (a) See Note 14 (b) See Note 2 (c) See Note 9 (d) See Note 10 33 PAGE 33 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The Corporation's significant accounting policies are as follows: a. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of Zemex Corporation and its wholly-owned subsidiaries (the "Corporation"). All material intercompany transactions have been eliminated. As discussed in Note 2, Alumitech, Inc. ("Alumitech") was acquired in two separate transactions and, accordingly, was accounted for on an equity basis until it became a wholly-owned subsidiary in February 1995. b. INVENTORIES Inventories are stated at the lower of cost or market and are computed using the average cost method. It is not practical to segregate finished products from ore and concentrates. Supplies are stated at cost using the first-in, first-out or average cost method. c. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are recorded at cost. Repairs and maintenance are charged to expense as incurred. Expenditures for major renewals and improvements are capitalized. When assets are sold or otherwise retired, the cost and accumulated depreciation or depletion are removed from the accounts and any gain or loss is included in results of operations. Provisions for depreciation are based upon estimated useful lives, using principally the straight-line method. Depletion of mining properties and depreciation of other mining assets are computed using the unit-of-production method, except in the case of the Corporation's mica operation where the estimated reserves exceed the expected production during the term of the mining lease. The mica mining lease rights and deferred costs, including all preproduction and set-up costs, are amortized using the straight-line method over the term of the mining lease. d. POSTRETIREMENT BENEFITS Pension Plans Generally, the funding policy of the Corporation is to contribute annually at a rate that is intended to provide for the cost of benefits earned during the year and which will amortize prior service costs over periods of 10 to 30 years, subject to Internal Revenue Service limits for deductible contributions. 34 PAGE 34 Healthcare and Other Postretirement Benefits Other Than Pensions The Corporation accounts for healthcare and other postretirement benefits other than pensions in accordance with Statement of Financial Accounting Standards ("SFAS") No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions". This Statement requires the accrual of all postretirement benefits other than pensions during the years in which employees render the necessary services to be entitled to receive such benefits. The 1997, 1996 and 1995 amounts include the current year expense and the transition liability which is being amortized over twenty years as allowed by SFAS No. 106 (Note 7). e. FOREIGN CURRENCY TRANSLATION The functional currency for the Corporation's foreign operations is the local currency. Foreign currency assets and liabilities are translated using the exchange rates in effect at the balance sheet date. The effect of exchange rate fluctuations on translating foreign currency assets and liabilities into U.S. dollars is accumulated as part of the cumulative translation adjustment component of shareholders' equity. Results of operations and cash flows are translated using the average exchange rates during the year. Gains and losses from foreign currency transactions are included in net income for the year. f. REVENUE RECOGNITION Revenue is recognized when goods are shipped to customers. Consignment sales are recognized when a customer draws the goods from inventory. g. RESEARCH AND DEVELOPMENT EXPENSE Research and development expenses were $961,000, $622,000 and $320,000 for the years ended December 31, 1997, 1996 and 1995, respectively. h. PROVISION FOR FUTURE RECLAMATION COSTS Costs for future reclamation have been provided for based upon estimated future reclamation costs allocated over the expected productive lives of the Corporation's quarries and mines. i. INCOME TAXES The Corporation accounts for income taxes in accordance with SFAS No. 109, "Accounting for Income Taxes". This Statement requires income taxes to be recognized during the year in which transactions enter into the determination of financial statement income, with deferred taxes being provided for temporary differences between amounts of assets and liabilities for financial reporting purposes and such amounts as measured by tax laws. 35 PAGE 35 j. EARNINGS PER SHARE The Corporation calculates earnings per share in accordance with SFAS No. 128, "Earnings Per Share", and has given affect to this standard on a retroactive basis. Under this standard, earnings per share is calculated based upon the weighted average number of common shares outstanding. For the purpose of calculating earnings per share, stock dividends are considered to be issued at the beginning of the period. k. DEFERRED FINANCING COSTS Costs associated with the issuance of long term debt are deferred, and are being amortized over the term of the debt on a straight-line basis. The unamortized balance is included in other assets. l. OTHER ASSETS Other assets includes assets held for sale which are stated at the lower of cost or estimated net realizable value. In determining the estimated net realizable value, the Corporation deducts from the estimated selling price the projected costs to bring the assets into a saleable condition, to dispose of the assets and to hold the property to an expected date of sale. Other assets also includes patents which are stated at cost and are being amortized over their remaining life of 13 years on a straight-line basis. Intangible assets are evaluated periodically and, if conditions warrant, an impairment valuation is provided. m. CASH EQUIVALENTS For purposes of the consolidated statements of cash flows, highly liquid investments with original maturities of three months or less, when purchased, are considered as cash equivalents. n. STOCK-BASED COMPENSATION COSTS Stock-based compensation costs for pro forma presentation purposes (Note 9) are based on the fair value of each option at the grant date. The option value is calculated using the Black-Scholes option-pricing model. 2. ACQUISITIONS AND DISPOSITIONS ACQUISITIONS Acquisition of Alumitech, Inc. In June 1994, the Corporation acquired its initial 39.5% investment in Alumitech by investing $2,000,000 to acquire treasury stock. In 1995, the Corporation increased its interest to 100% by issuing 722,352 shares of common stock with an ascribed value of $6,599,000. The shares were issued as to 266,106 to Dundee Bancorp International Inc. ("Dundee Bancorp"), the 36 PAGE 36 Corporation's largest shareholder, and as to 266,106 to Clarion Capital Corporation, a company controlled by a director of the Corporation. The balance of the 722,352 shares went to various other parties. Alumitech, an aluminum dross processor, has developed proprietary technology that enables it to have the ability to convert 100% of its dross feed into marketable products. The acquisition of Alumitech has been accounted for using the purchase method of accounting and, accordingly, the purchase price has been allocated to the assets purchased and liabilities assumed based upon the fair values at the date of acquisition. The net purchase price was allocated as follows:
Working Capital $ 73,000 Property, plant and equipment 5,527,000 Patents 7,363,000 Other assets 225,000 Other liabilities (2,192,000) Deferred income taxes (2,025,000) ----------- $ 8,971,000 ----------- CONSIDERATION Carrying value of investment at date of acquisition of remaining interest $ 2,372,000 Capital stock 6,599,000 ----------- $ 8,971,000 -----------
The operating results of Alumitech have been included in the consolidated statements of income from the date of acquisition. On the basis of a pro forma consolidation of the results of operations as if the acquisition had taken place at the beginning of fiscal 1994, rather than at February 15, 1995, consolidated net sales would have been $64,500,000 for fiscal 1994, and $86,900,000 for fiscal 1995. Consolidated pro forma income and earnings per share would not have been materially different from the reported amounts for fiscal 1994 and 1995. Such pro forma amounts are not necessarily indicative of what the actual consolidated results of operations might have been if the acquisition had been effective at the beginning of fiscal 1994. Acquisition of the Assets of Benwood Limestone Company, Inc. On May 15, 1995, the Corporation acquired the assets of Benwood Limestone Company, Inc. ("Benwood"), through its wholly-owned subsidiary, Suzorite Mineral Products, Inc. ("SMP"), for $3,658,000. The acquisition of Benwood augmented the Corporation's talc and mineral processing capability. 37 PAGE 37 DISPOSITIONS Asset Sale During the third quarter of 1997, the Corporation sold certain assets previously utilized to manufacture refractory ceramic fiber. These assets were vended into a joint venture in which the Corporation retained an interest. The sale resulted in a pre-tax gain of $1,768,000, which has been included in other income (expense). Total proceeds were $4,324,000, which included $2,050,000 in cash and $2,274,000 in notes receivable included in accounts receivable. 3. INVENTORIES
1997 1996 ------------ ----------- ORE, CONCENTRATES AND FINISHED PRODUCTS Industrial minerals $ 8,312,000 $ 8,565,000 Metal products 4,110,000 5,035,000 ------------ ----------- 12,422,000 13,600,000 MATERIALS AND SUPPLIES Industrial minerals 3,955,000 3,683,000 Metal products 1,218,000 888,000 ------------ ----------- 5,173,000 4,571,000 ------------ ----------- $ 17,595,000 $18,171,000 ------------ -----------
4. PROPERTY, PLANT AND EQUIPMENT
1997 1996 ------------ ----------- Land $ 5,344,000 $ 5,246,000 Mining properties and deferred costs 8,125,000 6,605,000 Buildings 18,092,000 16,728,000 Machinery and equipment 64,952,000 50,937,000 Construction in progress 8,308,000 15,065,000 ------------ ----------- Total property, plant and equipment, at cost 104,821,000 94,581,000 Less: Accumulated depreciation, depletion and amortization 34,009,000 32,497,000 ------------ ----------- Net property, plant and equipment $ 70,812,000 $62,084,000 ------------ -----------
The effective lives of the Corporation's buildings and machinery and equipment are estimated to be 30-40 years and 3-15 years, respectively. As of December 31, 1997, the Corporation estimates that approximately $3,973,000 will be expended to complete its construction in progress. 38 PAGE 38 5. OTHER ASSETS
1997 1996 ---------- ---------- Prepaid pension cost (Note 7) $1,378,000 $1,488,000 Assets held for resale (Note 10) 300,000 300,000 Deferred financing costs 646,000 659,000 Long term note receivable 549,000 - Other 547,000 318,000 Patents, net 6,357,000 6,673,000 ---------- ---------- $9,777,000 $9,438,000 ---------- ----------
6. INCOME TAXES The provision for income taxes consists of the following components:
1997 1996 1995 ---------- ----------- ---------- Income from operations before provision for income taxes Domestic $7,476,000 $1,492,000 $7,708,000 Foreign 586,000 171,000 191,000 ---------- ---------- ---------- Total pre-tax income $8,062,000 $1,663,000 $7,899,000 ---------- ---------- ---------- Current tax provision Federal $1,277,000 $478,000 $1,849,000 State and local 211,000 123,000 293,000 Foreign 350,000 76,000 37,000 ---------- ---------- ---------- Total 1,838,000 677,000 2,179,000 ---------- ---------- ---------- Deferred tax provision Federal 279,000 (1,369,000) 283,000 State and local 152,000 (257,000) 55,000 Foreign - - 40,000 ---------- ---------- ---------- Total 431,000 (1,626,000) 378,000 ---------- ---------- ---------- Benefit of operating loss and tax credit carryforwards - - (3,076,000) ---------- ---------- ----------- Provision for (recovery of) income taxes $2,269,000 $ (949,000) $ (519,000) ----------- ---------- ----------
39 PAGE 39 The following tabulation reconciles the U.S. federal statutory income tax rate to the federal, state and foreign overall effective income tax rate.
1997 1996 1995 ----- ----- ----- % % % Statutory federal rate 34.0 34.0 34.0 State income tax (net of federal benefit) 3.0 (0.9) 1.4 Non-recognition from foreign loss 1.3 - - Difference in foreign tax rates 0.5 - - Benefit of operating loss carryforwards (net of foreign income taxes) - (43.8) (38.1) Percentage depletion (11.4) (47.9) (4.9) Other 0.7 1.5 1.0 ----- ----- ----- Effective income tax rate 28.1 (57.1) (6.6) ----- ----- -----
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. At December 31, 1997 and December 31, 1996, the Corporation had unused tax benefits of $6,661,000 and $6,172,000, respectively, related to U.S. federal and state net operating loss and tax credit carryforwards. Significant components of the Corporation's deferred tax assets and liabilities as of December 31 are as follows (dollars in thousands):
1997 1996 U.S. Foreign Total U.S. Foreign Total ------- -------- ------- ---- ------- ----- Deferred tax assets Net operating loss and tax credit carryforwards $6,661 $ - $6,661 $6,172 $ - $6,172 Accrued expenses and reserves 958 - 958 763 - 763 Bad debt allowances 110 - 110 139 - 139 Inventories 280 - 280 526 - 526 Other 167 - 167 63 - 63 ------- ------ ------- ------ ------ Gross deferred tax assets 8,176 - 8,176 7,663 - 7,663 Valuation allowance (523) - (523) - - - ------- ------ ------ ------- ------ ------ Net deferred tax assets 7,653 - 7,653 7,663 - 7,663 ------- ------ ------ ------- ------ ------ Deferred tax liabilities Property, plant and equipment 3,206 2,012 5,218 2,656 2,075 4,731 Patent 1,658 - 1,658 1,791 - 1,791 Pension contributions 580 - 580 521 - 521 Other 357 - 357 424 - 424 Total 5,801 2,012 7,813 5,392 2,075 7,467 ------- ------ ------ ------- ------ ------ Net deferred tax (assets) liabilities $(1,852) $2,012 $ 160 $(2,271) $2,075 $ (196) ------- ------ ------ ------- ------ ------
40 PAGE 40 At December 31, 1997, the Corporation had approximately $12,462,000 of federal net operating loss carryforwards available to reduce future taxable income, which will expire between 2002 and 2011. Additionally, the Corporation has unused general business tax credits, which expire between 1998 and 2011, and alternative minimum tax credits. The Corporation also has state net operating losses and investment credit carryforwards; however, a valuation allowance of $523,000 has been recognized to offset the related deferred tax asset due to the uncertainty of realizing the full benefit of the tax attribute carryforward. 7. PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS Pension Plans The Corporation has several pension plans covering substantially all domestic employees. The plans covering salaried employees provide pension benefits that are based on the compensation of the employee. In all plans, the plan assets exceed the benefit obligations and hence the plans are overfunded. Net periodic pension cost (income) included the following components:
1997 1996 1995 ---------- ---------- --------- Current service costs $ 466,000 $ 528,000 $ 369,000 Interest cost on projected benefit obligations 978,000 1,028,000 940,000 Actual return on assets (1,383,000) (389,000) (2,587,000) Net amortization and deferral 49,000 (1,023,000) 1,164,000 ---------- ---------- ---------- Net pension expense (income) $ 110,000 $ 144,000 $ (114,000) ---------- ---------- ----------
Net amortization and deferral consists of amortization of net assets at transition and deferral of subsequent net gains and losses. The assumptions used to determine projected benefit obligations were (i) a discount rate of 7% in 1997, 1996 and 1995; (ii) an expected long term rate of return on assets of 8.75% in 1997, 1996 and 1995; and (iii) an increase in the level of compensation of 4% in 1997, and 6% in each of 1996 and 1995. 41 PAGE 41 The status of the plans and the amounts recognized in the consolidated balance sheets of the Corporation for its pension plans as of December 31, 1997 and 1996 are tabulated below:
1997 1996 ------------- ------------ Actuarial present value of benefit obligations vested benefit obligation $ 11,191,000 $ 11,687,000 ------------ ------------ Accumulated benefit obligation $ 11,350,000 $ 11,896,000 ------------ ------------ Projected benefit obligation $(15,126,000) $(15,925,000) Plan assets at fair value 17,147,000 16,432,000 ------------ ------------ Plan assets in excess of projected benefit obligation 2,021,000 507,000 Unrecognized net loss (662,000) 1,071,000 Prior service cost not yet recognized in net periodic pension cost 196,000 239,000 Unrecognized net assets at year end (177,000) (329,000) ------------ ----------- Prepaid pension cost included in consolidated balance sheets $ 1,378,000 $ 1,488,000 ------------ -----------
Other Postretirement Benefits The Corporation provides healthcare and life insurance benefits for certain retired employees, which are accrued as earned (Note 1). The cost of such benefits was $66,000 in 1997, $85,000 in 1996 and $95,000 in 1995. The unrecognized obligation for postretirement benefits is not material. 8. LONG TERM DEBT
1997 1996 ----------- ----------- Credit facility (a) $18,056,000 $14,167,000 Other term loans (b) - 813,000 Industrial Development Revenue Bonds (c) 3,570,000 4,080,000 Promissory notes 70,000 113,000 Capital leases (d) 654,000 488,000 Other 196,000 337,000 ----------- ----------- Total debt 22,546,000 19,998,000 Less: Current portion 2,019,000 2,201,000 ----------- ----------- Long term debt $20,527,000 $17,797,000 ----------- -----------
(a) During 1995, the Corporation entered into a $30,224,000 credit facility with a syndicate of two banks. During 1997, the credit facility was amended to increase the total availability to $50,224,000. The amended credit facility is further subdivided into four facilities: (i) a $30,000,000 revolving credit facility; (ii) a $10,000,000 multiple advance term loan facility; (iii) a $5,224,000 standby letter of credit; and (iv) a $5,000,000 operating line. These facilities are secured by specific assets and a floating charge over the Corporation's assets. The facilities bear interest at rates varying from bank prime to bank prime plus 0.25% and from LIBOR plus 1.25% to LIBOR plus 42 PAGE 42 2.25%, depending upon certain financial tests. As at December 31, 1997 and December 31, 1996, there was $3,000,000 and $5,000,000, respectively, outstanding under the operating line and $8,056,000 and $9,167,000, respectively, outstanding under the multiple advance term loan facility. Advances under the revolving credit facility as at December 31, 1997 and 1996 were $10,000,000 and $5,000,000, respectively, and the standby letter of credit was issued to secure Pyron Corporation's ("Pyron") Industrial Development Revenue Bonds (see (c) below). The operating line matures June 30, 1998 and is reviewed annually for renewal. The multiple advance term loan facility requires quarterly payments of $278,000 which commenced April 1, 1996 with the balance outstanding, if any, due January 1, 2000. (b) The other term loans incurred interest at the prime rate of the lending institution plus 1.25% to 1.5% and were repaid in full during 1997. (c) Pyron entered into a lease agreement on November 29, 1989 with the Niagara County Industrial Development Agency (the "Agency") to partially finance the construction of a manufacturing facility, acquire and install equipment and machinery, and renovate the existing Pyron facility for the purpose of manufacturing atomized steel powders. The agreement authorized the Agency to issue and sell Industrial Development Revenue Bonds in the aggregate principal amount of $7,650,000 to provide the funds for the project. While the bonds are not the obligation of Pyron, the agreement requires Pyron to make quarterly rental payments equal to the debt service under the sinking fund requirements and interest on the outstanding principal to the Agency. The amount outstanding at December 31, 1997 and 1996 was $3,570,000 and $4,080,000, respectively. Pyron's annual obligation under the agreement is $510,000 until paid. The bonds bear interest at a variable rate not to exceed 15% per annum. The rate at December 31, 1997 was 4.15% and at December 31, 1996 was 4.15%. Pyron has the option to convert the bonds to a fixed interest rate at any time during the term. Under the lease agreement, Pyron may purchase the facility at any time during the term, which expires November 1, 2004, by paying the outstanding principal amount of the bonds plus $1. The bonds are collateralized by a mortgage on the land, the new facility and the existing facility, which have an aggregate net book value of approximately $9,602,000 at December 31, 1997. A bank has provided Pyron with a letter of credit which is available to support Pyron's obligations under the lease agreement. If the bondholders tender their bonds for repayment, the letter of credit will be utilized to pay the bondholders. The letter of credit is collateralized under the credit facility in (a) above. The letter of credit expires on October 1, 1999. (d) The Corporation has long term capital lease agreements at various rates and for various terms with maturities ranging from 1998 to 2002 for equipment used in its operations. The carrying value of the leased equipment as of December 31, 1997 was $623,000. The current obligation under the long term lease agreement is $280,000. 43 PAGE 43 Principal repayments on long term debt are as follows:
----------- 1998 $ 2,019,000 1999 1,850,000 2000 16,515,000 2001 618,000 2002 524,000 Thereafter 1,020,000 ----------- $22,546,000 -----------
Interest Interest earned and expensed in each of the past three years is summarized below:
1997 1996 1995 ---------- ------------ --------- Interest income $ 150,000 $ 93,000 $ 268,000 Interest expense (2,094,000) (1,041,000) (791,000) ----------- ------------ --------- Net interest expense $(1,944,000) $ (948,000) $(523,000) ----------- ------------ ---------
9. COMMON SHARES, STOCK OPTIONS AND WARRANTS Shares Outstanding During 1995, the Corporation increased its authorized common stock from 10,000,000 to 25,000,000, par value one dollar per share, of which 20,000,000 will be denominated common shares and 5,000,000 will be denominated preferred shares. There were 8,463,491 common shares issued and outstanding as of December 31, 1997 and 8,269,099 common shares as of December 31, 1996. During 1997, 1996 and 1995, 90,000, 80,000 and 49,000 common shares, respectively, were purchased pursuant to the Corporation's employee stock purchase plan for an aggregate cost of $729,000, $672,000 and $471,000, respectively. As part of a share repurchase program in 1997, the Corporation purchased 60,000 common shares on the open market for an aggregate cost of $492,000, 344,000 common shares in 1996 for an aggregate cost of $3,170,000, and 376,000 common shares in 1995 for an aggregate cost of $3,572,000. In 1995, the Corporation completed its purchase of 100% of Alumitech by issuing 722,352 common shares with an ascribed value of $6,599,000. 44 PAGE 44 Dividends On November 21, 1997, the Corporation declared a 2% stock dividend to shareholders of record on December 1, 1997, which was paid December 15, 1997. Retained earnings were charged $1,598,000 as a result of the issuance of 165,537 common shares of the Corporation, and cash payments of $5,000 in lieu of fractional shares. On October 18, 1996, the Corporation declared a 2% stock dividend to shareholders of record on November 4, 1996, which was paid November 18, 1996. Retained earnings were charged $1,255,000 as a result of the issuance of 161,398 common shares of the Corporation, and cash payments of $5,000 in lieu of fractional shares. On November 10, 1995, the Corporation declared a 2% stock dividend to shareholders of record on November 24, 1995, which was paid December 8, 1995. Retained earnings were charged $1,403,000 as the result of the issuance of 167,149 common shares of the Corporation, and cash payments of $3,000 in lieu of fractional shares. Stock Options The Corporation provides stock option incentive plans and has, with shareholder approval, issued options to certain directors outside of the plans. The plans are intended to provide long term incentives and rewards to executive officers, directors and other key employees contingent upon an increase in the market value of the Corporation's common shares. Options for 10% of the Corporation's outstanding common shares are issuable under the plans. The following is a summary of option transactions under the Corporation's stock option plans:
1997 1996 1995 ------- ------- ------- Options outstanding at beginning of year 845,550 852,550 556,550 Options granted during the year 198,000 61,000 341,000 Options exercised during the year (13,800) (45,000) (38,250) Options canceled during the year (87,000) (23,000) (6,750) Options outstanding at end of year 942,750 845,550 852,550 Options exercisable at end of year 628,250 631,550 511,550 Price range of options granted during the year $7.00 - 8.63 $7.75 - 9.75 $9.125-10.13
The options expire from 1998 to 2003. In addition, directors out of the plan were, in aggregate, granted 30,000 shares in 1997. The Corporation does not recognize compensation expense for its stock-based compensation plans. Had compensation cost for the stock option plans been determined based upon fair value at the grant date for awards under these plans consistent with the methodology prescribed under SFAS No. 123, "Accounting for Stock-Based Compensation", the Corporation's net income and earnings per share would have been reduced by approximately $221,000 or $0.03 per share in 1997, $341,000 or $0.04 per share in 1996 and $2,177,000 or $0.28 per share in 1995. The fair value of the options granted during 1997, 1996 and 1995 is estimated to be $221,000, $173,000 and $1,344,000, respectively. The fair value of each option grant is estimated on the date of grant using the 45 PAGE 45 Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 1997, 1996 and 1995: dividend yield of 0%; expected volatility of 32%, 38% and 39%, respectively; risk-free interest rate of 5.5%; and an expected life of 5 years. Warrants During 1993, in connection with the acquisition of Suzorite Mica Products Inc., the Corporation issued a transferable warrant to Dundee Bancorp to purchase at any time prior to July 15, 1995 up to 100,000 common shares (104,040 shares after adjustments for stock dividends) at $7.00 per share. The warrant was exercised by Dundee Bancorp on July 14, 1995 for proceeds of $700,000. As a result of a stock rights offering in 1990, 725,769 warrants were issued. Each warrant entitled the holder to purchase, prior to July 15, 1995, 1.08 common shares at an exercise price of $8.56 per share, which was repriced from $9.25 per share as a result of dilution due to the issuance of stock dividends. Of the 725,769 warrants originally issued, the Corporation repurchased 218,046 warrants at an aggregate cost of $222,000. During 1995, 448,000 warrants were exercised for 484,027 common shares for net proceeds of $4,143,000. During 1994, 31,514 warrants were exercised resulting in the issuance of 32,771 common shares at an exercise price of $8.88 per share for aggregate proceeds of $291,000. There were no remaining warrants outstanding as at December 31, 1995. Note Receivable from Shareholder The note receivable from shareholder of $1,749,000 represents amounts due from the Corporation's President and Chief Executive Officer pursuant to the Key Executive Common Stock Purchase Plan. The loan, which was used to acquire 357,000 common shares of the Corporation, is non-interest bearing and secured by a pledge of most of the shares acquired. The terms were amended in 1997 and the loan is now due on the earlier of August 12, 1998 or 30 days after the termination of employment. Since the loan arose from the sale of shares, it is classified as a reduction of shareholders' equity. 10. REORGANIZATION CHARGES AND UNUSUAL ITEMS Reorganization Charges During the first quarter of 1996, the Corporation recognized reorganization costs of $1,752,000 in connection with the reorganization of its minerals division, a write-down to market of inventory held in Brazil, and the recognition of a provision for costs associated with storing and selling the material. The Brazilian enterprise was unsuccessful primarily due to rapidly deteriorating market prices which made market penetration extremely difficult. 46 PAGE 46 Unusual Items In December 1991, the Corporation closed its industrial minerals plant located in Connecticut. The assets of this operation were reclassified to assets held for resale and written down in 1991 by $430,000 to their estimated net realizable value. These assets were written down by a further $300,000 in 1993. In 1995, a portion of the property was sold for approximately net book value. In 1996, the purchaser defaulted on the payment obligations. Accordingly, the Corporation instituted legal action to repossess the property. A provision of $723,000 has been recorded to provide for reclamation costs, legal costs and to write-down the property to current market value. 11. OPERATING LEASES AND OTHER COMMITMENTS Operating Leases The Corporation has a number of operating lease agreements primarily involving equipment, office space, warehouse facilities and rail sidings. The operating lease for equipment provides that the Corporation may, after the initial lease term, renew the lease for successive yearly periods or may purchase the equipment at the fair market value. An operating lease for office facilities contains escalation clauses for increases in operating costs and property taxes. The majority of the leases are cancellable and are renewable on a yearly basis. Future minimum rental payments required by operating leases that have initial or remaining non-cancellable lease terms in excess of one year as of December 31, 1997 are as follows:
Years Minimum Lease Payments - - ----- ---------------------- 1998 $ 515,000 1999 341,000 2000 287,000 2001 282,000 2002 273,000 Thereafter 556,000 ---------- Total minimum lease payments $2,254,000 ----------
Rent expense was $492,000, $668,000 and $442,000 in 1997, 1996 and 1995, respectively. 47 PAGE 47 12. QUARTERLY FINANCIAL DATA (UNAUDITED) The following is a summary of certain unaudited quarterly financial data.
1997 1996 ----------- ----------- NET SALES First quarter $23,700,000 $22,405,000 Second quarter 25,199,000 21,356,000 Third quarter 24,773,000 21,601,000 Fourth quarter 23,554,000 21,058,000 ----------- ----------- $97,226,000 $86,420,000 ----------- ------------ OPERATING INCOME First quarter $1,766,000 $ 170,000 Second quarter 2,255,000 1,512,000 Third quarter 2,372,000 1,444,000 Fourth quarter 1,978,000 (60,000) ---------- ---------- $8,371,000 $3,066,000 ---------- ---------- NET INCOME First quarter $ 862,000 $ 6,000 Second quarter 1,064,000 819,000 Third quarter 2,095,000 779,000 Fourth quarter 1,772,000 1,008,000 ---------- ---------- $5,793,000 $2,612,000 ---------- ---------- NET INCOME PER SHARE - BASIC First quarter $.11 $.00 Second quarter .13 .10 Third quarter .26 .10 Fourth quarter .22 .13 ---- ----
13. FINANCIAL INSTRUMENTS Financial instruments which potentially subject the Corporation to concentrations of credit risk consist principally of trade receivables. Concentrations of credit risk with respect to trade receivables are limited due to the large number of customers comprising the Corporation's customer base and their dispersion across a number of different industries, principally construction, glass, electrical and automotive. Financial instruments comprise cash and cash equivalents, accounts receivable, short term bank borrowings, accounts payable, accrued liabilities, and long term debt. The fair value of these financial instruments approximates their carrying value reflecting: (i) the proximity to market rates of the interest obligations on the debt instruments; and (ii) the limited durations of all of the other instruments. 48 PAGE 48 14. CHANGES IN NON-CASH WORKING CAPITAL ITEMS The changes in non-cash working capital items are as follows:
1997 1996 1995 ----------- ----------- ----------- (Increase) in accounts receivable $(1,285,000) $(1,838,000) $ (783,000) Decrease (increase) in inventories 576,000 2,005,000 (2,742,000) Decrease (increase) in prepaid expenses 602,000 (547,000) (16,000) Increase (decrease) in accounts payable and accrued liabilities 2,882,000 (185,000) (1,495,000) Increase in accrued income taxes 934,000 32,000 376,000 ----------- ---------- ----------- $ 3,709,000 $ (533,000) $(4,660,000) ----------- ---------- -----------
15. RELATED PARTY TRANSACTIONS As at December 31, 1997 and 1996, accounts receivable included amounts due from directors of $115,000 and $350,000, respectively. These amounts are non-interest bearing, with no fixed terms of repayment, and have not otherwise been disclosed in the consolidated financial statements. During 1997, the Corporation agreed to guarantee a personal loan in the amount of $600,000 drawn down by the President and Chief Executive Officer. The proceeds of the loan were used to acquire common shares of the Corporation on the open market. The shares acquired are held by the Corporation as security for the guarantee. 16. SEGMENT INFORMATION The Corporation has two principal lines of business and is organized into two operating units based on its product lines: (i) industrial minerals, and (ii) metal products. Industrial mineral products include feldspar, kaolin, mica, talc, baryte, feldspathic sand and industrial sand. These products are marketed principally to the automotive, housing, and ceramics industries in North America. They are produced from mines and processing plants located near Edgar, Florida; Monticello, Georgia; Murphy, North Carolina; Spruce Pine, North Carolina; Natural Bridge, New York; Van Horn, Texas; Benwood, West Virginia; Boucherville, Quebec; and Suzor Township, Quebec. Metal products are processed in Niagara Falls, New York; St. Marys, Pennsylvania; and Greenback and Maryville, Tennessee. The Corporation's ferrous and non-ferrous metal powders are marketed primarily in North America to manufacturers of powder metallurgy parts used in the automotive and transportation industries. Aluminum dross is recycled at a plant in Cleveland, Ohio and ceramic fiber products are marketed from a plant in Streetsboro, Ohio. Corporate assets principally include cash, term deposits, and furniture and fixtures. 49 PAGE 49 Information pertaining to sales and earnings from operations and assets by business segment appears below:
1997 1996 1995 ------------ ------------ ------------ Net sales (a) Industrial minerals $43,396,000 $40,469,000 $37,089,000 Metal products 53,830,000 45,951,000 47,967,000 ------------ ----------- ------------ Total $97,226,000 $86,420,000 $85,056,000 ------------ ----------- ------------ Operating income (a) Industrial minerals $5,203,000 $ 3,118,000 $4,622,000 Metal products 3,221,000 1,868,000 3,677,000 Reorganization charges (b) - (1,752,000) - General unallocated corporate (53,000) (168,000) 43,000 ------------ ----------- ------------ Total 8,371,000 3,066,000 8,342,000 ------------ ----------- ------------ Interest expense net (1,944,000) (948,000) (523,000) Other income, (expense) net (b) 1,635,000 (455,000) 80,000 Income before income taxes $8,062,000 $1,663,000 $7,899,000 Capital expenditures (a) (c) Industrial minerals $9,945,000 $11,855,000 $9,653,000 Metal products 6,633,000 4,528,000 5,784,000 Corporate 6,000 43,000 14,000 ------------ ----------- ------------ Total $16,584,000 $16,426,000 $15,451,000 ------------ ----------- ------------ Depreciation, depletion & amortization (a) Industrial minerals $3,228,000 $2,352,000 $1,932,000 Metal products 2,241,000 1,948,000 1,451,000 Corporate 402,000 394,000 306,000 Total $5,871,000 $4,694,000 $3,689,000 Identifiable assets at year end (a) Industrial minerals $65,750,000 $60,915,000 $52,348,000 Metal products 42,400,000 37,145,000 34,133,000 Corporate (d) 10,624,000 11,316,000 10,200,000 ------------ ------------ ----------- Total $118,774,000 $109,376,000 $96,681,000 ------------ ------------ -----------
(a) The Corporation's businesses are located in the United States and Canada, which the Corporation considers one geographic segment. (b) See Note 10. (c) Capital expenditures for 1995 exclude property, plant and equipment of $9,027,000 acquired in connection with the Corporation's 1995 acquisitions (Note 2). (d) Includes cash and cash equivalents for all years presented. 50 PAGE 50 17. CONTINGENCIES The Corporation is involved in various legal actions in the normal course of business. In the opinion of management, the aggregate amount of any potential liability, for which provision has not already been made, is not expected to have a material adverse effect on the Corporation's financial position or its results. 18. SUBSEQUENT EVENTS (i) In January 1998, the Corporation, through its wholly-owned subsidiary, Zemex Industrial Minerals, Inc., acquired Aspect Minerals, Inc., a muscovite mica producer, for approximately $2,200,000, which includes the assumption of debt. The two facilities acquired in the purchase are located in the Spruce Pine, North Carolina area and will operate under the name Zemex Mica Corporation. The acquisition was financed through borrowings on the Corporation's credit facility. (ii) On February 24, 1998, Industria Mineraria Fabi S.r.l. ("Fabi") became a partner in the Corporation's talc facility located in Benwood, West Virginia by acquiring a 40% interest in a new limited liability company, Zemex Fabi-Benwood, LLC. As part of the transaction, Fabi paid $3,400,000 and is providing access to its technology. SMP, a wholly-owned subsidiary of the Corporation, will manage the new entity pursuant to an operating agreement. 19. COMPARATIVE FIGURES Certain 1996 and 1995 figures in the consolidated financial statements have been reclassified to conform with the 1997 presentation. 51 PAGE 51 ----------------------------------------------------------------- SELECTED FINANCIAL DATA -----------------------------------------------------------------
1997 1996 1995 1994 1993 ------------ ------------- ------------ ------------ ----------- SUMMARY OF OPERATIONS Net Sales $ 97,226,000 $ 86,420,000 $85,056,000 $55,306,000 $47,958,000 Reorganization and Restructuring Charges - 1,752,000 - - 1,250,000 Operating Income 8,371,000 3,066,000 8,342,000 5,841,000 1,237,000 EBITDA(a) 15,877,000 7,305,000 12,111,000 8,319,000 6,952,000 Other Income (Expenses) (309,000) (1,403,000) (443,000) (262,000) 2,421,000 Net Income 5,793,000 2,612,000 8,418,000 6,250,000 1,852,000 ------------ ------------ ----------- ----------- ----------- FINANCIAL POSITION Working Capital $ 18,975,000 $ 18,688,000 $19,709,000 $26,046,000 $ 9,288,000 Total Assets 118,774,000 109,376,000 96,681,000 70,864,000 48,414,000 Long Term Debt (non-current portion) 20,527,000 17,797,000 7,485,000 5,461,000 8,735,000 ------------- ------------ ----------- ----------- ---------- COMMON SHARES Average Common Shares Outstanding 8,097,642 7,937,379 7,843,992 5,149,401 4,148,009 Actual Common Shares Issued and Outstanding at Year End 8,463,491 8,269,099 8,355,722 7,168,153 4,535,283 ------------- ------------ ----------- ----------- ---------- PER COMMON SHARE Basic Earnings per Share $0.72 $0.33 $1.07 $1.21 $0.45 Diluted Earnings per Share 0.70 0.32 1.03 1.12 0.40 EBITDA(a) per Share 1.96 0.92 1.54 1.62 1.68 ------------- ------------ ----------- ---------- ---------- COMMON SHARE PRICES High $10.94 $10.00 $10.88 $12.25 $8.00 Low 6.75 6.88 8.25 6.13 4.50 Year End 8.75 7.00 10.00 8.63 6.75 ------------- ------------ ----------- ---------- -----------
(a) EBITDA is defined as earnings before interest, tax, depreciation and amortization 52 PAGE 52 CORPORATE DIRECTORY BOARD OF DIRECTORS Paul A. Carroll Chairman and Chief Executive Officer,World Wide Minerals Ltd. (1) Morton A. Cohen Chairman, President and Chief Executive Officer,Clarion Capital Corporation John M. Donovan Corporate Consultant (1)(2)(3) Thomas B. Evans, Jr. Vice Chairman, The Evans Group, Ltd. (2) Ned Goodman Chairman, President and Chief Executive Officer, Dundee Bancorp Inc. Peter O. Lawson-Johnston Chairman and Trustee, Solomon R. Guggenheim Foundation; Chairman, The Harry Frank Guggenheim Foundation (1)(3) Richard L. Lister President and Chief Executive Officer of the Corporation (3) Patrick H. O'Neill Corporate Consultant (2) William J. vanden Heuvel Counsel, Strook, Strook & Lavan (3) (1) Member of the Executive Compensation/Pension Committee (2) Member of the Audit Committee (3) Member of the Executive Committee OFFICERS Peter O. Lawson-Johnston Chairman of the Board Richard L. Lister President and Chief Executive Officer Allen J. Palmiere Vice President and Chief Financial Officer Peter J. Goodwin Vice President President, Industrial Minerals Terrance J. Hogan President, Alumitech, Inc. George E. Gillespie President, Metal Powders Patricia K. Moran Corporate Secretary and Assistant Treasurer 53 EXECUTIVE OFFICE Zemex Corporation Canada Trust Tower BCE Place, 161 Bay Street Suite 3750, P.O. Box 703 Toronto, Ontario Canada M5J 2S1 Telephone: (416) 365-8080 Fax: (416) 365-8094 Website: www.zemexcorp.com INDEPENDENT PUBLIC ACCOUNTANTS Deloitte & Touche Toronto, Ontario, Canada TRANSFER AGENT AND REGISTRAR CAPITAL STOCK First Union National Bank of North Carolina Shareholder Services Group 1525 West W.T. Harris Blvd-3C3 Charlotte, North Carolina U.S.A. 28262-1153 Telephone: (704) 590-7387 Fax: (704) 590-7598 FORM 10-K Copies of Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 1997 will be available after April 1, 1998 by writing to Shareholder Relations at the Executive Office Printed in Canada on recycled paper Design: Tara Pain Rowlands Design Photography: Jim Allen Production: Walter J. Mishko & Co. Inc. EX-22 3 EXHIBIT 22 1 EXHIBIT 22 SUBSIDIARIES OF THE REGISTRANT The subsidiaries listed below are directly or indirectly wholly-owned and all are consolidated in the financial statements.
STATE OR COUNTRY IN WHICH SUBSIDIARY NAME INCORPORATED OR ORGANIZED - - --------------- ------------------------- Alumitech, Inc. Delaware Aluminum Waste Technology, Inc. Delaware AWT Properties, Inc. Ohio ETS Schaefer Corporation Ohio The Feldspar Corporation North Carolina Pyron Corporation New York Pyron Metal Powders, Inc. Delaware Suzorite Mica Products Inc. Ontario, Canada Suzorite Mineral Products, Inc. Delaware Zemex Industrial Minerals, Inc. Delaware
EX-24.A 4 EXHIBIT 24(A) 1 ZEMEX CORPORATION AND SUBSIDIARIES SCHEDULE IX - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES FOR THE YEAR ENDED DECEMBER 31,
Column A Column B Column C Column D Column E Column F - - -------- ---------- ----------------- --------------- ---------- -------- Balance at Additions Charged Balance Beginning to Costs and Other Additions At End Description of Period Expenses (Deductions) Deductions of Period - - ----------- --------- ----------------- --------------- ---------- --------- 1997 Reserves - Other $599,000 $165,000 $250,000 -- $1,014,000 Allowance for Uncollectable Accounts 452,000 84,000 (76,000) $132,000 328,000 -------- -------- -------- -------- ---------- 1996 Reserves - Other $605,000 $100,000 -- $106,000 $ 599,000 Allowance for Uncollectable Accounts 386,000 148,000 $ 5,000 87,000 452,000 -------- -------- -------- -------- --------- 1995 Reserves - Other $549,000 $154,000 -- $ 98,000 $ 605,000 Allowance for Uncollectable Accounts 414,000 77,000 $ 2,000 107,000 386,000 -------- -------- -------- -------- ----------
S-1 EX-27 5 EXHIBIT 27
5 YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 2,189,000 0 16,615,000 (328,000) 17,595,000 38,185,000 104,821,000 (34,009,000) 118,774,000 19,210,000 0 9,204,000 0 0 67,330,000 118,774,000 97,226,000 97,226,000 70,826,000 88,855,000 (1,635,000) 0 1,944,000 8,062,000 2,269,000 5,793,000 0 0 0 5,793,000 0.72 0.70
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